CBN Mops N2.13trn From Banking Industry Through SDF
Nigeria’s banks through the Standing Deposit Facility (SDF) have deposited N2.13 trillion with the Central Bank of Nigeria (CBN) amid excess liquidity in the financial sector and the removal of the cap on the remunerative policy.
An SDF is an overnight deposit facility that allows banks to park excess liquidity (money) to CBN and earn interest.
Olayemi Cardoso at the 58th annual Bankers’ Dinner and 60th Anniversary of the Chartered Institute of Bankers of Nigeria (CIBN) in Lagos disclosed that the apex bank removed the cap on the remunerable SDF to increase activity in the SDF window and manage liquidity.
The bank when issuing the guideline had stated that “With reference to the circular to all banks and discount houses, Re: Guidelines on accessing the CBN Standing Deposit Facility, Ref: FMD/DIR/GEN/CIR/05/020 and dated November 6, 2014, after further review, the remunerable daily placements by banks at the SDF shall not exceed N2billion.
“The SDF deposit of N2 billion shall be remunerated at the interest rate prescribed by the Monetary Policy Committee from time to time. Any deposit by a bank in excess of N2 billion shall not be remunerated. The provisions of this circular took effect on July 11, 2019.”
However, the financial data of the CBN also revealed that banks, through the Standing Lending Facility (SLF), borrowed N2.13 trillion from the CBN in the past 10 days.
Excess liquidity in the financial sector is influenced by the Federation Account Allocation Committee (FAAC) injection of N906.955 billion in October, N903.48 billion in September, N1.80 trillion in August, and N1.89 trillion in July to the three tiers of government.
Amid excess liquidity, the Money Supply (M3) increased to N67.18 trillion as of September 2023 from N49.33 trillion in September 2022.
M3 is a measure of the money supply as well as large-time deposits, institutional money market funds, short-term repurchase agreements (repo), and larger liquid assets.
The applicable rates for the SDF and SLF increased by 50 basis points to 11.50 and 19.50 percent, respectively, following the hike in the policy rate by 50 basis points to 18.75 percent in June 2023.
The Monetary Policy Committee of the CBN unanimously narrowed the asymmetric corridor from +100/-700 to +100/-300 basis points around the MPR.
The Central Bank has consistently maintained a hawkish monetary policy stance since May 2022, to tackle the rising inflation rate (27.33 percent as of October 2023).
SDF so far this year has witnessed significant patronage as DMBs and merchant banks deposits reached the highest peak of about N876.87 billion in July 2023, the highest so far this year.
However, the CBN has over the years maintained that strong patronage at the SDF confirms healthier liquidity in the banking system.
CBN had maintained that the strong patronage at the SDF confirmed healthier liquidity in the banking system, stressing that banks and merchant banks were in search of better yields.
The current inflation rate in Nigeria is above the yield on Treasury bills (T-Bills) and DMBs are looking for risk-free investments, which SDF has provided since the MPR hike.
Conversely, banks deposited N2.95 trillion with CBN in October 2023, representing an increase of 273 percent from N790.9 billion in September 2023.
Insidebusiness Online can report that DMBs and merchant banks between January and October 2023 have deposited N8.34 trillion with CBN, an increase of 158 percent from N3.24 trillion in the corresponding period of 2022.
Analysts stated that financial institutions prefer depositing with CBN as it is safe and risk-free, stressing that the present business environment has forced banks and discount houses to lend cautiously in the real sector.
The CEO of Wyoming Capital & Partners, Tajudeen Olayinka, noted that the surge in bank deposits with CBN led to uncertainty in the business environment over rising insecurity, among others.
He stated, “The most significant factor is the increasing level of threat in the environment of business in Nigeria, arising from insecurity, supply chain problems, rising inflation and poor purchasing power, low level of productivity, rising unemployment, liquidity overhang and paucity of risk-free financial instruments.”
He added “As a result, most banks prefer to be debited by CBN for running short of LDR limit, as against extending credit to businesses that are finding it difficult to survive. It is all about managing risk.”
Analysts at CSL Stockbrokers Limited in a report had said, “In our view, measures such as these fail to address the fundamental issues behind banks’ reluctance to lend and would only result in banks looking for innovative ways to get around the rules.
“The low-risk appetite among banks for lending to the real sector can be attributed in no small measure to the high risks in the operating environment which hinders the survival of SMEs and the profitability of businesses in general. Also, the absence of reliable credit history and effective institutions also hinder banks from lending to the real sector.
“Consequently, banks prefer investing a huge chunk of their liquid assets in the government instruments given that they do not have CAR implications, are tax-free and do not result in Non-Performing Loans (NPLs)”
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