By Babajide Komolafe

BANKS’ borrowing from the Central Bank of Nigeria (CBN) shot up by 80 percent to N52 trillion in 2017, from N29 trillion in 2016,  due to pressure to survive the impact of high interest rate regime and ceaseless liquidity mop-up, driven by the tight monetary policy of the apex bank.

To enjoy this huge liquidity lifeline, accessed through the apex bank’s Standing Lending Facility (SLF), the banks paid N40.48 billion as interest to the CBN, representing 84 percent increase from N22  billion  paid  in 2016.

In sharp contrast, banks’ deposit placement with the apex bank, through its Standing Deposit Facility (SDF) fell by 15.6 percent to N9.35 trillion while interest earned also fell by 10 percent to N4.27 billion in 2017.

According to analysts, the above development was triggered by the high interest rate regime, which made the CBN’s Standing Lending Facility (SLF) the cheapest source of borrowing for banks, and the Standing Deposit Facility (SDF) unattractive for deposit placement for banks.

Meanwhile, the above development exceeded Financial Vanguard projections for banks patronage of the SLF and SDF for 2017.

In an exclusive report published on Monday June 26th, 2017, Financial Vanguard projected that banks’ borrowing from the apex bank will rise by 51 percent to N45 trillion in 2017, while interest paid will also rise by 64 percent to N22 billion.

Financial Vanguard also projected that banks’ deposit placement with the CBN will fall by 14.3 percent to N15.6 trillion in 2017, while interest earned by banks was projected to rise moderately to N5.1 billion.

Banks borrowing from CBN and interest paid

According to the quarterly economic reports of the CBN, banks’ borrowing from the CBN fell by 9.6 percent to N12.25 trillion in the first quarter of 2017 (Q1’2017) from N13 trillion in the fourth quarter of 2016 (Q4’2016).

But in the second quarter of 2017 (Q2’2017), banks’ borrowed more from the apex bank. Their borrowings through the SLF rose sharply quarter-on-quarter by 19 percent to N14.6 trillion. This trend, however, did not persist in the third quarter (Q3’2017) as borrowing dropped by 7 percent to N13.6 trillion. The borrowing further dropped by 14 percent, quarter-on-quarter to N11.7 trillion in the fourth quarter (Q4’2017).

Interest paid by banks to the apex bank followed the same pattern. In Q1’2017, banks paid N9.3 billion as interest to the CBN, up by 6.7 percent, from N9.97 billion paid in Q4’2016. In Q2’2017, interest paid by banks spiked by 47 percent to N13.7 billion. This increase was reversed in Q3’2017, as interest paid fell back to N9.3 percent.    This trend was repeated in Q4’2017, as interest paid by banks fell by 14 percent to N8.04 billion.

The above indicate that while banks’ borrowing from CBN and interest paid rose in the first half of 2017 (H1’2017), they however declined in the second half of the year (H2’2017).

Deposit placement by banks and interest earned

The CBN economic reports showed that banks’ deposit placement with the CBN through the SDF rose by 14 percent to N3.36 trillion in Q1’2017, from N2.95 trillion in Q4’2016.

However, the deposit placement declined quarter-on-quarter, by 42 percent and 21 percent to N1.96 trillion and N1.54 trillion in Q2’2017 and Q3’2017 respectively. The trend was reversed in Q4’2017, as their deposit placement spiked by 62 percent (quarter-on-quarter) to N2.49 trillion.

In a similar, fashion, interest earned by banks on deposit with CBN, rose by 66 percent to N1.74 billion in Q1’2017. But it dropped by 36 percent and 54 percent to N1.12 billion and N520 million in Q2’2017 and Q3’2017, before rising sharply by 71 percent quarter-on-quarter) to N890 million in Q4’2017.

The above indicated mixed trend in banks’ deposit placement with the apex bank and interest earned in 2017.

Analysts divided over trend in 2018

Analysts were however divided over the trend of banks’ patronage of the SLF and SDF in 2018.

While, Mr. Bismarck Rewane, Managing Director/Chief Executive, Financial Derivatives Company Limited, and Mr. Ayo Akinwunmi, Head, Research, FSDH Merchant Bank, projected that banks will borrow less from the apex bank this year, stressing  that factors responsible for the sharp increase in borrowing in 2017, will be reversed in 2018, Mr. Olakunle Ezun, Research Analysts with Ecobank Nigeria, projected that the trend in banks’ borrowing will persist this year.

According to Akinwunmi of FSDH Merchant Bank, “Last year we had high interest rate. Cost of borrowing was quite high because of the high treasury bill rate environment.

“So CBN was giving money to banks at 16 percent and when they look at the weighted average and say it is cheaper for me to borrow from here. Also there was no incentive for banks to place money with the CBN. If you place money with the CBN I think the interest rate is    9 percent. So your observation is correct and it was because of the high interest rate regime.

“But that was last year. This year we may not likely see that trend.    A number of the banks this year will do bonds, and commercial papers. Last year they could not do bonds because they don’t want to lock down three years, five years money at high interest rate of about 18 percent.

“But now that interest rate has calmed down substantially, they will do bonds, and they can also do commercial papers, rather than them going to borrow from the CBN. So that is the trend we will likely see.

“The progress the federal government has also made in the Eurobond has also paved the way for Nigerian corporate borrowers to go and borrow money from them. International lenders, when Nigeria was in recession did not want to lend to us because of the fragile or volatile environment. So that is also improving now.

“So the banks had limited option to get funds last year, it was now left for the CBN to provide the money, both from the macroeconomic and high interest rate environment, that was why they went to the CBN. That was the big reason for the sharp increase in banks’ borrowing from the CBN. So this year, the trend will not continue, because the situation is been reversed.”

Also explaining factors that caused banks’ borrowing from CBN to rise by 80 percent, Rewane of FDC said: “The treasury bill rate was too high. The asymmetric corridor was Monetary Policy Rate (MPR) plus two percent and MPR minus five percent.

“So, I could borrow from the CBN at MPR plus two, which is 16 percent, but if I want to borrow from interbank, I will borrow at 90 percent or 80 percent because of the Cash Reserve Ratio (CRR), because of the TB mopping up, and then the subsidised lending to the banking system, which is MPR plus two.

“If the CBN makes the corridor MPR plus five and MPR minus five, it will make the corridor symmetric rather than asymmetric. So if a bank borrows from CBN, it borrows at MPR Plus 5 and if it lends to the CBN, it lends at MPR Minus five. So they should make it symmetric.

“As long as you have that spike in interbank rate because of the mopping up activities, and the CRR, the banks will continue to have incentives to go and borrow from the CBN.”

Speaking further, he said: “What we should do is to reduce the CRR, the banks that were going to borrow from CBN, when you look at how much they have in CRR, you will see that they were not actually borrowing from the CBN, they were actually borrowing their own money. Yes, because the CBN never returned the money. So the effective CRR rate of some banks is 30 to 35 percent.

“Because if you give me N300 million    deposit today, the CBN takes away 22.5 percent which is N67.5 million; If    you come the next day to take back the deposit, the CBN will not refund the 22.5 percent CRR back to me, so effectively, I have lost N367.5 million and N60 million. So except the return is instantaneous which they are not doing, the effective CRR is much higher that what the CBN is saying.”

On whether the trend in 2017 will persist this year, Rewane responded: “No. We are in a declining interest rate environment. So it will not continue.”

Ezun of Ecobank however differs, attributing the sharp increase in banks’ patronage of the SLF to quest for profitability, arguing that as a result the trend will persist in 2018.

He said: “Movement in market rates are mostly driven by liquidity, expectations and monetary policy operation. Importantly, is the market liquidity?

“The banks are in between maintaining strong liquidity and profitability. But the pressures to achieve strong Return on Equity (ROE) and sometimes earn good bonus make them to strive towards profitability at the expense of liquidity.

“To remain liquid, especially for the marginal banks, they access the CBN window for liquidity to either fund their illiquidity and sometimes short position in the interbank. It is mostly precarious for the banks with low deposit base

“Secondly, the funding requirements to cover Open Market Operation (OMO) TBs sales and CBN’s foreign exchange Secondary Market Intervention sales (SMIS) intervention also accounted for the huge SLF volume in 2017.

“Do I see this trend in 2018?   It is most likely to continue due to pressure to make more money by the bank. And the funding pressure on the CBN side and the market.   It is a pre election year, so there might be need to fund to anchor inflation and support the NGN.

“On the side of the banks, some might be on overdrive to buy more OMO    bills to earn accruals and also remain liquid. These factors will make them to access the CBN window.”

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