The Central Bank of Nigeria (CBN) has lifted the suspension on banks borrowing from its Standing Lending Facility (SLF), establishing a lending rate of 31.75 percent. This move follows decisions made during the 296th meeting of the Monetary Policy Committee (MPC).
In response, the CBN has directed authorized dealers to submit SLF requests via the Scripless Securities Settlement System (S4) between 5:00 pm and 6:30 pm. This directive, which takes immediate effect, was outlined in a circular signed by Omolara O. Duke, Director of the Financial Markets Department.
Dealers are also granted access to the Intraday Liquidity Facility (ILF) at no cost if repaid on the same day. Tilewa Adebajo, CEO of The CFG Advisory, remarked that this development is expected to boost liquidity in the interbank markets. However, any ILF not settled by the end of the day will incur a 5.00 percent penalty and be automatically converted to SLF at a rate of 36.75 percent. Additionally, the CBN has reinstated collateral execution and rediscounting of pledged instruments at a penal rate, as per the approved repo guidelines.
The increase in the SLF rate to 31.75 percent indicates the CBN’s intent to manage excess liquidity in the market. With higher borrowing costs, interest rates on loans and credit facilities are likely to rise, potentially slowing borrowing by businesses and consumers. This could dampen economic growth, with households facing higher loan costs, reduced disposable income, and decreased consumer spending.
The MPC has also adjusted the Asymmetric Corridor to +500/-100 basis points from the previous +100/-300 basis points around the Monetary Policy Rate (MPR), setting the Standing Deposit Facility (SDF) rate at 25.75 percent. For Commercial and Merchant Banks, this rate applies to deposits up to N3.00 billion, with a reduced rate of 19.00 percent for excess deposits. Payment Service Banks will receive the same SDF rate for deposits up to N1.50 billion, with a 19.00 percent rate for amounts above this threshold.
The new SDF rates encourage banks to deposit surplus funds with the CBN, thereby reducing excess liquidity in the economy. While this measure helps curb inflation, it may also limit the funds available for lending, impacting credit availability for businesses and consumers, and potentially constraining overall economic activity.
These adjustments are part of the CBN’s broader strategy to effectively manage liquidity while balancing economic growth and inflation control. The changes, now in immediate effect, underscore the CBN’s commitment to maintaining financial stability amid ongoing economic challenges.
Ayodele Akinwunmi, Senior Relationship Manager at FSDH Merchant Bank’s Corporate Banking Group, emphasized that the Central Bank acts as a lender of last resort. He noted that the practice of banks borrowing from the central bank is standard globally, including in countries like the US and UK, and is typically used for short-term, secured lending to cover immediate needs.
At the July 2024 MPC meeting, CBN Governor Olayemi Cardoso and MPC member Murtala Sabo Sagagi both voted to adjust the asymmetric corridor, further tightening liquidity conditions. Before this decision, Deposit Money Banks’ borrowing from the CBN window reached an all-time high of N5.38 trillion in just five trading days.
Tomi Bayode, an analyst at Parthian Partners Limited, highlighted the significant challenges faced by the financial sector in 2024, including foreign exchange shortages and rising inflation. She attributed the record N1.5 trillion borrowed by banks on July 4, 2024, to the removal of the cap on the remunerable Standing Deposit Facility, liquidity pressures, and the CBN’s efforts to reduce excess cash in the economy.
Credit: Businessday NG (Text Excluding Headline)
