*Forces banks’ borrowing from CBN to rise 107%
*As money market instruments record bearish activities

By Emeka Anaeto, Business Editor & Babajide Komolafe, Economy Editor

There are indications that the banking system is under liquidity pressure as they increased their recourse to the Central Bank of Nigeria, CBN, for cash.

Though a few of the leading banks still maintains a reasonable level of liquidity the entire money market is already feeling the heat of lower cash supply, which has affected transactions in treasury instruments last week.

Meanwhile, Banks’  borrowing from the CBN rose sharply by 107 per cent, month-on-month, MoM, to N755.64 billion in July. 

The CBN has two short term lending windows for banks, namely the  Standing Lending Facility (SLF) and the Repurchase (Repo) arrangement.

Under the SLF arrangement, the apex bank lends to the deposit money banks at interest rate of 100 basis points (bpts) above the Monetary Policy Rate (MPR), while under the Repo arrangement the banks get funds by pledging/ sell their financial assets (securities) to the apex bank with the agreement to repurchase same back at  a specific date and usually for a higher price.

But the CBN also accepts deposits from banks through its Standing Deposit Facility (SDF) and pays an interest rate of 300  bpts below the MPR.

Data from the CBN showed that banks borrowed N755.64 billion in July through the SLF, representing a 107 per cent increase from N365.06 billion they borrowed in June. 

But leading banks that still hold some significant cash were able to approach the apex bank with deposits pushing up the industry’s SDF holdings in July 25 per cent MoM to N783.66 billion in July from N625.66 billion in June. 

The rise in banks’ deposits with the apex bank at a time the banking system is experiencing liquidity shortfall indicates that the few liquid banks prefer to put their excess cash in CBN.

This development has been reinforced as other banks that are not so liquid prefer borrowing  from the apex bank instead of borrowing from each other in the inter-bank money market.   

Though the system still recorded some idle cash which reflected in the 3.8 per cent MoM increase in the average Opening Liquidity in the interbank money market to N572.63 billion in July from N552.41 billion in June, last week level of activities indicated a declining liquidity in the system.

Bearish T-Bills, bonds market

At close of business on Friday banking system liquidity closed at ¦ 277.8billion, 52.4% lower than prior week’s level as liquidity became constrained.

Also there was a bearish outing in the secondary market of the Treasury Bills, T-Bills, as average yield rose 17 bases points (bps) week-on-week (WoW) to 7.6%.

This development, according to market dealers, was influenced by sell-offs on the 91 and 182-day NTB instruments as yield rose 26bps and 28bps to 5.3% and 7.1% respectively.

Analysts at Afrinvest West Africa, a Lagos based investment banking firm, said, “Despite the treasury bills maturities worth N154.0billion, system liquidity is expected to remain pressured, hence we anticipate sustained bearish performance.

The situation also affected the bonds market as negative performance ruled last week’s trading activities.
Despite the gains on the first two trading days, the domestic bonds market closed negative as average yield across tenors rose 17bps WoW to 13.0% on the back of depressed liquidity in the financial system.

The short and long-term bonds witnessed the most selloffs, with yields rising 32bps and 11bps WoW to 9.6% and 15.1% respectively. 

Looking into the current week, Afrinvest analysts stated: “We expect the result of the bonds auction to guide yield directions in the domestic market. For the Eurobonds space, we expect the bearish sentiment to persist due to risk off sentiment from foreign investors in search of higher yields following fresh rate hike by top globally systemic central banks”.

Before the resurfacing of the tight liquidity, CBN have been battling high liquidity with eyes on curtailing the inflationary impact.

According to the Acting CBN Governor, Mr. Ade Shonubi, the huge liquidity in the banking system is a major challenge faced by the apex bank in curtailing the upward trend in the inflation rate.

Consequently, the apex bank has consistently raised its Monetary Policy Rate, MPR, which hit 18.75 per cent at the last Monetary Policy Committee, MPC, meeting in July.

Addressing the press at the end of the MPC meeting, Shonubi said: “During this MPC meeting,  we had a lot of time talking about inflation, talking about the different tools in managing inflation. 

“One of the key challenges now is the liquidity overhang and we need to look at the various tools available to deal with it.

“As a matter of fact,  we made reference to that in the Communique. 

“So in addition to interest rate hike, we have also come up with various ways to fight the liquidity because we believe that the liquidity surfeit  runs, not just across inflation, also but on exchange rate and other parts of the economy.”