Nigeria’s SLF rate hike leads to 76% drop in bank borrowing from CBN in August 2024

Following a significant increase in the Central Bank of Nigeria’s (CBN) Standing Lending Facility (SLF) rate to 31.75 per cent, banks borrowing from the apex bank plummeted by 76.4 per cent in August 2024, totalling N4.04 trillion compared to N17.12 trillion reported in July 2024.

This sharp decline marks the third lowest borrowing figure for the year, as Nigerian banks adopt a more cautious approach amidst rising interest rates.

The CBN’s decision to raise the SLF rate comes in the wake of a broader monetary policy adjustment. The Monetary Policy Rate (MPR) was set at 26.75 per cent, compelling financial institutions that borrow from the CBN to pay a higher rate of 31.75 per cent per annum. 

Additionally, the CBN revised the Asymmetric Corridor around the MPR from +100/-300 basis points to +500/-100 basis points. 

This strategic shift aims to discourage banks from holding excess liquidity at the central bank and to stimulate increased lending activities within the economy.

In a circular signed by Dr Omolara Duke, Director of the Financial Markets Department at the CBN, banks were informed that they could access the SLF through the Scripless Securities Settlement System (S4) during operating hours from 5:00 pm to 6:30 pm. 

Furthermore, authorized dealers are now permitted to utilize the Intraday Lending Facility (ILF) at no cost, provided the loans are repaid on the same day.

“The suspension of the Standing Lending Facility (SLF) is hereby lifted, and Authorized Dealers should send their requests for SLF through the S4 within the specified operating hours,” the circular stated. 

It also outlined penalties for non-compliance, including a 5.00 per cent penalty for participants who do not settle their ILF, which the system will convert to SLF at 36.75 per cent.

The drastic reduction in bank borrowing from the CBN has elicited varied reactions from financial experts and industry stakeholders. 

David Adnori, Vice President of Highcap Securities Limited, attributed the decline in borrowing to the hike in SLF rates, emphasizing that essential businesses are feeling the strain. 

“The hike in SLF rates has made borrowing prohibitively expensive for key sectors, seriously impacting their operations and growth prospects,” Adnori stated.

Professor Uche Uwaleke, a Finance and Capital Markets expert at Nasarawa State University, expressed concern over the CBN’s aggressive rate hikes. 

“The increase in MPR to 26.75 per cent aims to reduce liquidity within the banking system and escalate the cost of credit, which will adversely affect economic output,” he explained. 

Uwaleke highlighted that the adjustment to the asymmetric corridor poses additional risks, squeezing liquidity further and increasing credit costs, thereby dampening economic activity and negatively impacting the equities market.

He added, “With an MPR of 26.75 per cent, banks now face borrowing costs of 31.75 per cent while being remunerated for excess deposits at 25.75 per cent. This squeeze on liquidity and higher credit costs will likely hinder economic output and market performance.”

While SLF borrowing declined, the Standing Deposit Facility (SDF) saw a substantial increase, rising to N8.12 trillion in August 2024 from N2.2 trillion in July 2024—a surge of 269.3 per cent. 

This spike in SDF deposits is a direct response to the CBN’s efforts to mop up excess liquidity in the financial sector as part of its strategy to combat inflation.

The CBN introduced a new interest rate structure allowing commercial and merchant banks to earn up to 25.75 per cent on deposits up to N3 billion, with deposits exceeding this threshold earning 19 per cent. 

Payment Service Banks (PSBs) are also eligible for similar rates, incentivizing banks to deposit excess funds with the central bank.

David Adnori linked the hike in SDF rates to the CBN’s measures to control inflation by reducing excess liquidity.

“The increase in SDF rates is part of the CBN’s strategy to absorb surplus liquidity and manage inflationary pressures effectively,” he noted.

Analysts at Afrinvest Research caution that the MPC’s adjustments to the asymmetric corridor are likely to exert further pressure on funding costs for banks, both directly and indirectly. 

“The tightening of liquidity conditions through the SLF and SDF will increase borrowing costs for banks and could lead to higher lending rates across the money market,” they explained.

They also pointed out that while the MPR is a useful tool, it has limitations in addressing structural economic issues such as insecurity and inadequate infrastructure. 

“Fiscal policy reforms are essential to complement monetary measures. Continued rate hikes without decisive fiscal actions may increase the burden on businesses without significantly curbing inflation,” Afrinvest analysts concluded.

Furthermore, the rise in the MPR is expected to lead to an upward repricing of fixed-income instruments, making them more attractive to investors compared to equities. 

This shift could result in a reallocation of investments from the stock market to fixed-income securities, impacting overall market dynamics.