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The recent revelation that commercial and merchant banks’ loans from the Central Bank of Nigeria (CBN) have reached N12.46 trillion in eight months, from January to August 2023, underscores the liquidity challenge in the banking sector. According to data from the CBN, the amount represents 75 per cent rise within the period under review and on year-on-year (YoY) basis, a rise of 79 per cent compared with the N6.96 trillion recorded in the corresponding period of 2022.
The 2022 currency redesign policy by the apex bank might have created acute cash crunch in the banking industry. As a result, the banks resorted to the two main windows of accessing funds from the CBN, the Standing Lending Facility (SLF), and Standing Deposit Facility (SDF). The former window is used by banks primarily to run their daily business operations, while the latter is used to deposit cash with the apex bank.
However, the increase in banks’ borrowing in recent times, especially using the SLF window, may have been a reflection of the increase in Currency in Circulation (CIC) in the economy. From January to May 2023, merchant and commercial banks’ loans from the CBN stood at N7.5 trillion, representing an increase of 276 per cent from the N1.99 trillion reported in the first five months of 2022. The figure rose sharply in the first half of this year to N10.26 trillion, an increase of 138 per cent year-on-year from N4.3 trillion that the banks borrowed during the corresponding half-year in 2022.
Besides, a month-by-month breakdown of the funds borrowed from the CBN showed that the sum of N453.7 billion was debited for the banks in February 2023. In March, it rose by N3.98 trillion, a hefty 776 per cent increase. In April, it was N4.47 trillion, May and June, N590.29 billion and N235 billion, July and August, N908.43 billion and N1.3 trillion, respectively. The development has raised fears over liquidity, solvency, sufficiency of internal controls and other matters.
There is nothing wrong with banks borrowing from the central bank. However, such loans should not rise to the extent of overcrowding the banks’ Cash Reserves Ratio (CRR), which is the minimum amount that banks are required to keep with the apex bank. In the case of most banks, as the figures from the CBN have shown, the overreliance on the CBN is not tidy. Capital is fundamental and vital part of the banking industry. It enables the establishment of a banking entity by supplying the funds necessary to acquire the physical and human resources they need for competition. In fact, the ability to attract funds at reasonable cost has become one of the ingredients of both merchant bank and deposit the banks’ management in recent years.
Based on the figures disclosed by the CBN, the first quarter(Q1) borrowing, which stood at N4.95trillion, had outstripped the half-year 2022 figure, while the subsequent borrowing increased by 5.05 per cent to N5.4trillion in Q2’2023. Unfortunately, the banks’ deposits in the CBN decreased by over 2 per cent in the Q2’23 to N898.25billion. However, the combined impact of the two quarters in the first six months of 2023 was 34 per cent rise in the banks’ SDF balance with the CBN.
Despite some reforms by the Tinubu administration aimed at reversing some prevailing macroeconomic imbalances such as fuel subsidy removal, exchange rate harmonisation, tax reforms, and other banking policy reforms, banks’ borrowing from the CBN has not reduced. This can be traced to the increase in banks’ working capital, weakening domestic currency and inflationary pressure. All of this has increased banks’ non-performing loans.
The CBN should consider a downward review of its prime lending rate to banks, which is the interest rate that banks charge their creditworthy customers. In February this year, it was increased to 13.62 per cent (YoY) from 13.17 per cent in February 2022. Also, the maximum lending rate, which is the average highest amount charged by banks for lending to riskier sectors, rose to 28.75 per cent from 28.14 per cent.
Though the expectation from banks’ performance still looks positive, the continued increase in borrowings from the CBN, coupled with the current foreign exchange shortage, is not good. This poses a risk on the banks’ assets because the banks are not insulated from the vagaries of the economy, including external and internal shocks. Moving forward, the banks should either recapitalise or re-engineer their key variables for better performance.
Let the CBN be alive to its responsibilities and protect depositors’ funds. This has become necessary following the recent forecast that the banking sector will face emergency risks from current policy reforms. Therefore, the regulatory authorities should respond swiftly to the challenges. The CBN must not relent on its mandate, just as the banks’ management should look inwards on how to improve customer services by removing the excessive charges that have eroded depositors’ confidence in the banks. At the same time, we welcome the ongoing implementation of Basel III Capital Standards.
