The financial landscape in Nigeria has seen significant shifts as banks' borrowing from the Central Bank of Nigeria (CBN) through its Standing Lending Facility (SLF) drastically fell by 76.4% in August. This drop brought the borrowing amount down to N4.04 trillion, a sharp decline from the N17.12 trillion recorded in July.
On the flip side, the deposits made by banks in the CBN’s Standing Deposit Facility (SDF) surged, skyrocketing by 270.7% month-on-month (MoM) to N8.12 trillion in August, up from N2.19 trillion in July. This drastic shift in figures reveals that banks are now holding substantial idle funds. However, these funds are not being utilized by businesses, which can be attributed to the increasing borrowing rates triggered by the recent hike in the Monetary Policy Rate (MPR) by the CBN.
The surge in SDF deposits can be linked to the recent adjustment by the CBN in the rates for both the SLF and SDF, as part of its strategic efforts to curb banks from hoarding excess liquidity. The aim is to encourage these banks to inject more funds into the economy by extending credit to businesses, thereby stimulating economic activities.
This adjustment was officially communicated following the 296th Monetary Policy Committee (MPC) meeting. In the meeting, the apex bank revised the Asymmetric Corridor around the MPR, altering it from +100/-300 basis points (bps) to +500/-100 bps. This revision serves as a deterrent for banks to avoid holding excess liquidity at the CBN, and instead, promote increased lending activities.
To further discourage banks from holding idle funds, the CBN increased the SLF rate, which is the rate at which banks borrow short-term funds from the central bank, to 31.75%. Additionally, the SDF rate was adjusted as follows: for commercial and merchant banks’ deposits up to N3 billion, the rate was raised to 25.75%, while deposits above N3 billion now attract a rate of 19%.
These developments highlight the ongoing efforts by the CBN to regulate the flow of liquidity within the banking sector and ensure that funds are channeled towards productive economic activities. However, the sharp increase in borrowing costs has created a scenario where businesses are hesitant to take on new loans, leading to a build-up of idle funds within the banking system. This situation could pose challenges for economic growth if banks do not respond by adjusting their lending practices to meet the evolving needs of the business community.