By Sodiq Adelakun
In a concerning trend, commercial banks and merchant banks in Nigeria have shown an increasing dependence on the Central Bank of Nigeria (CBN) for liquidity.
Recent data from the CBN reveals a significant surge in borrowing from the apex bank during the first eight months of 2023, indicating a growing reliance on this source of funding.
According to the CBN data accessed, commercial banks and merchant banks borrowed a staggering total of N12.46trillion from the CBN during the aforementioned period.
This figure represents a substantial increase compared to the N6.96tn borrowed in the same period of 2022, reflecting a significant 79 per cent surge in borrowing.
To access funds from the CBN, these financial institutions primarily utilize two facilities: the Standing Lending Facility (SLF) window for borrowing and the Standing Deposit Facility (SDF) window for depositing cash.
The surge in borrowing indicates that commercial and merchant banks are increasingly relying on the SLF window to meet their liquidity needs. This growing dependence on the CBN for liquidity raises concerns about the financial stability of these institutions.
While the SLF window provides a convenient source of funding, it also exposes the banks to potential risks associated with relying heavily on short-term borrowing.
Any disruptions in the availability of funds from the CBN could have severe consequences for the banking sector and the overall economy. The reasons behind this surge in borrowing are multifaceted.
One possible explanation is the tightening of credit conditions in the broader financial market, leading banks to turn to the CBN for additional liquidity.
Furthermore, economic uncertainties and market volatility may have prompted banks to seek a more stable source of funding, resulting in increased reliance on the apex bank. The implications of this trend extend beyond the banking sector.
As commercial and merchant banks rely more heavily on the CBN, it places a greater burden on the central bank to ensure the stability of the financial system.
The CBN must carefully manage its role as a lender of last resort to prevent any potential disruptions that could have far-reaching consequences for the economy.
To address this growing reliance on the CBN, it is crucial for commercial and merchant banks to explore alternative sources of funding.
Diversifying their funding base will not only reduce their vulnerability to potential disruptions but also contribute to a more resilient and stable financial system.
However, the surge in borrowing by commercial and merchant banks from the Central Bank of Nigeria highlights a concerning trend of increasing dependence on the apex bank for liquidity.
During the first eight months of 2023, banks accessed the SLF window in response to the CBN’s tightening monetary policy stance.
The SLF is a short-term lending window provided by the apex banking regulating body to commercial banks and merchant banks, allowing them to access liquidity for their day-to-day operations.
According to CBN data, commercial banks and merchant banks borrowed N10.25tn from the CBN via the SLF window between January and June of this year.
This marked a 138 per cent increase compared to the same period in 2022, when N4.3trillion was borrowed. The data also revealed that the borrowing in the first quarter of 2023, which amounted to N4.95trillion, exceeded the borrowing for the entire first half of 2022.
A monthly breakdown of the borrowing showed that in January, commercial banks and merchant banks borrowed N528.16billion from the CBN.
However, this figure dropped to N453.7bn in February 2023. In March, there was a significant increase of 776.22 per cent in borrowing, reaching N3.98trillion, which was the second highest amount after the N4.47trillion recorded in April 2023.
The data further indicated that borrowing for May and June 2023 amounted to N590.29 billion and N235.06 billion, respectively.