CBN pushes banks into a severe liquidity crisis

CBN pushes banks into a severe liquidity crisis

Following the Central Bank of Nigeria’s decision to impose 50 per cent cash reserve requirement (CRR) on public sector deposits, banks in the country seem to be facing a severe liquidity crisis. 

Recent data show that bank, discount houses and other financial institutions have embarked on a massive borrowing spree, increasing their borrowing from the CBN to manage the liquidity crisis. According to the CBN Economic Report for August 2013, banks increased their borrowing from the CBN Standing Lending Facility (SLF) from N793.08 billion in July to a whopping N2.465 trillion in August alone, representing an increase of 210.8 per cent.

The CBN commenced implementation of the policy in August following its decision during the Monetary Policy Committee meeting in July. Accordingly, it withdrew N896.43 billion being 50 per cent cash reserve requirement (CRR) on public sector from the banking system earlier that month.

The CBN data also reveal that on the average, banks borrowed N123.29 billion to sustain their operations in August compared with the daily average of N34.48 billion recorded in the preceding month.

That banks opted to borrow from the CBN even though it would disqualify them from accessing foreign exchange from the official foreign exchange market, a pointer to the severity of the liquidity crisis.

In the past, however, banks preferred to pay the high interbank rate for one day to borrow from other banks rather than to borrow from the CBN at 14.0 per cent and being barred from the official foreign exchange window.

The heavy dependence of the banking sector on monetised oil revenues for its liquidity has been a constant source of worry to the CBN. Speaking recently on the issue, the CBN governor, Malam Sanusi Lamido Sanusi said the apex bank have been stressing “the need to keep pushing banks into altering their business model to reduce vulnerability.”

The liquidity crisis has forced lending rates to rise. The CBN economic report for August released last week showed that banks’ deposit and lending rates generally trended upwards during the review month. It also revealed that all deposit rates of various maturities, including the average savings rate rose from a range of 2.45 - 7.41 per cent to a range of 2.63 - 7.47 per cent.

Also, it showed that at the interbank call segment, the weighted average rate which stood at 10.61 per cent at end-July 2013, increased by 4.52 percentage points to 15.13 per cent at end-August 2013. Similarly, the weighted average rate, at the open-buy-back (OBB) segment, rose by 3.9 percentage points to 14.31 per cent from the level in July 2013.


Online view pixel