Nigerian Deposit Money Banks (DMBs) deposited N822.34 billion with the Central Bank of Nigeria (CBN) in July 2023, marking a substantial 42% increase from N579.27 billion in June of the same year. Analysts attribute this surge to an abundance of liquidity in the banking sector and banks’ strategic hedging to enhance their Capital Adequacy Ratio (CAR).
This trend of increasing deposits with the CBN has been noticeable throughout the year. The figures show a consistent rise from January through July. In January, DMBs deposited N584.79 billion, followed by N668.87 billion and N471.39 billion in February and March 2023, respectively. The deposits rose to N223.04 billion in April, and then N461.85 billion in May.
The significant increase in deposits through the Standing Deposit Facility (SDF) also stands out, with a record N1.959 trillion disbursed to the three tiers of government in July 2023. SDF refers to the overnight deposit facility at the Central Bank, with an associated interest rate. The shift in the applicable interest rate on SDF and the Monetary Policy Rate (MPR) indicates changes in the Central Bank’s monetary policy approach.
Experts attribute the rise in deposits to the excess liquidity in the banking sector, driven by factors such as increased allocations from the Federation Account Allocation Committee (FAAC) and a growing money supply. The low inter-bank interest rates and the availability of cash incentivize banks to opt for saving with the CBN.
According to Ayokunle Olubunmi, Head of Financial Institutions Ratings at Agusto & Co, this trend is a reflection of the ample money circulating within the economy, leading banks to seek avenues to manage their liquidity effectively, even if that means depositing with the central bank.
Opinion: The increased deposits by Nigerian banks with the Central Bank highlight the complexities of managing liquidity in a financial system. Excess liquidity in the banking sector can lead to various challenges, including potential inflationary pressures and limitations on banks’ profitability. While depositing with the central bank might provide a temporary solution, it also underscores the importance of well-designed monetary policies and effective management of interbank rates to encourage lending and productive investment, thereby driving economic growth.
TDL