The scarcity of liquidity forced banks and merchant banks to rely more on the Central Bank of Nigeria (CBN) for short-term liquidity needs, which led to borrowing of 24.5 trillion naira from the umbrella bank between January and November 2021.
This is an increase of 315% from the 5.91 trillion naira borrowed the previous year.
The central bank has two short-term lending windows for banks and merchant banks, namely the Permanent Loan Facility (SLF) and the Repo Loan.
While the CBN lends money to banks through the SLF at an interest rate of 100 basis points (bps) above the key rate purchase of bank securities with agreement to resell on a specific date and at a higher price.
Data from the official CBN website showed that banks and merchant banks borrowing through SLF increased 315.2% to n12.23 trillion from naira 5.17 trillion, while borrowing through the repurchase agreement has increased from Naira 735.14 billion to Naira 5.15 trillion in the previous 11 months.
In the wake of aggressive borrowing, Nigeria’s real gross domestic product (GDP) grew 4.03% (year-on-year) in the third quarter (q3) of 2021, compared to 5.01 and -3.62% in the second. quarter 2021 and Q3 2020, respectively.
The growth trajectory has therefore been positive over the last four quarters following the exit from recession in 2020.
CBN Governor Godwin Emefiele at the latest Monetary Policy Meeting (MPC) in Abuja said money market rates were swinging in the standing facilities corridor, reflecting the liquidity conditions prevailing in the banking system.
Meanwhile, analysts attributed the increase in bank borrowing to the CBN to improving economic activities in the country.
According to PAC Holdings analyst Mr. Wole Adeyeye “Last year, the COVID-19 pandemic resulted in the lockdown of economic activities and restriction of travel in many states.
“Most businesses have been affected by the country’s economic recession in 2020. However, the increase in immunization in 2021 has resulted in improved economic activities.
“Most real sector companies increased their borrowing during this period to meet growing demand. Therefore, the GDP maintained positive growth in 2021. There may have been no opportunity in the economy to fund a project necessary for them to the CBN SLF. “
Some analysts believe the country’s liquidity crunch is responsible for the increase in DBM and merchant bank borrowing from the umbrella bank in the first four months of 2021.
Highcap Securities Limited Managing Director David Adnori said growing demands to support economic growth have forced banks and merchant banks to increase their borrowing from CBN.
He was quick to add that the liquidity shortage is another big factor that banks and merchant banks have borrowed funds from CBN to meet the daily demands of their customers.
Specifically, he said, “There are two reasons why banks can borrow heavily from CBN. The first is related to the booming economy as opportunities multiply in banks. Banks ‘balances might not be enough to meet customers’ borrowers, forcing them to borrow from CBN to lend to customers applying for credit.
“The CBN itself may not have that money and it can issue new money and borrow it from the banks that the bank will lend to customers. This is the method by which the money is printed by the CBN in a normal economy. These are the channels through which new money enters the economy. “
He further explained that “The second reason banks visit CBN to access money is when there is a shortage of liquidity in the system. Depositors, as you probably know, always give money to banks. The bank will try to access funds through the interbank market. and if they can’t, they try CBN as a lender of last resort to borrow money in order to strengthen their liquidity position. “
He explained that the increase in 2021 of loans from DMBs and investment banks is due to the stability of the national economy.
In his words, “The reason 2021 has doubled from last year is that the economy was depressed last year due to the COVID-19 lockdown. Also remember that the Bank interest was low.
“This year, this economy is recovering, interest rates have increased and banks are lending to borrowers. They can now visit CBN and borrow money at a lower rate and make a profit on the loan.”