‘Inflows’ Ease Liquidity Pressures on Nigerian Banks
Boosted by inflows, the short-term benchmark rates—open repo and overnight lending rates—decreased to double-digit lows due to improved liquidity balance within the financial system.
As a result, local deposit money banks’ activities at the Central Bank of Nigeria’s (CBN) standing lending facility were reduced strongly. Banks that fail to meet the required liquidity level are often precluded from participating in FX auctions.
Weak liquidity levels in the financial system cost banks to pay more for short-term rates. This is expected to impact its balance sheet funding costs. The more money in the financial system, then, the easier short-term borrowing in the segment would be.
Specifically, cash-rich Nigerian banks will attract lower rates on the funds. Last week, Nigerian banks accessed about N2 trillion from the apex bank window to augment their daily liquidity requirements. Then, short-term rates expanded to near 20%.
Some analysts told MarketForces Africa that the trend has been persistent amidst sustained debits on financial institutions’ cash reserves for failing to meet the CBN loan-to-deposit ratio.
Banks will factor its funding costs into its operation, and this could force interest-related transactions to be priced higher by the Nigerian lenders.
Things appear to be getting better at least for now due to large inflows. The financial system recorded an inflow from matured bonds and coupon payments after long liquidity strain in the market.
Federal government of Nigerian bond maturity worth ₦800 billion was received into the financial system; in addition to about N153 billion coupon payment.
In total, these inflows drove liquidity in the system to ₦1.3 trillion, the fattest since Jan-23, according to TrustBanc Capital Limited.
Accordingly, interbank rates eased further to close at 11.00% and 11.25%, respectively. Data from FMDQ Exchange showed that the overnight lending rate contracted by 25 basis points.
Earlier in the week, analysts at TrustBanc Capital reported that the deficit in the financial system improved by 99.9% to close at ₦0.41 billion.
Analysts said this reflected the impact of the Federation Account Allocation Committee (FAAC) disbursement worth ₦438.49 billion, credited into the system on Thursday.
As a result, pressure on the CBN short-term lending window eased, while funding rates compressed by about 400 basis points to clear at 14.63% and 15.25%, respectively, and analysts had indicated that liquidity conditions will relax further.
“We expect retail secondary market intervention sales (SMIS) auction debit and cash reserve (CRR) withdrawal to deplete available liquidity on Friday. #’Inflows’ Ease Liquidity Pressures on Nigerian Banks Naira Steadies as Banks Issue Update on FX Purchase
