In response to mounting liquidity challenges, Nigerian banks are increasingly resorting to expensive short-term commercial papers (CPs) to manage their cash flow. This shift comes as the Central Bank of Nigeria (CBN) enforces stricter cash reserve policies, driving up the cost of deposits for financial institutions. Access Holdings Plc, the country’s largest bank by assets, alongside other financial institutions, has already issued or plans to issue CPs to stabilize liquidity.
As of January 2025, the CBN’s raised cash reserve ratio (CRR) to 50%, which has significantly raised the cost of raising deposits. This policy has led to a sharp increase in deposit costs, with the effective rate surging to 36%, despite the nominal deposit rate standing at 19%. These constraints have made it difficult for banks to attract traditional deposits, forcing them to seek alternative sources of funding, like commercial papers.
The CBN’s series of interest rate hikes, which have raised the benchmark rate to 27.5%, and other monetary tightening measures have only exacerbated liquidity pressures. With the standing lending facility rate now at 31.75%, banks are finding it increasingly costly to secure short-term liquidity through conventional methods, pushing them towards CPs as a more cost-effective option.
While issuing CPs offers temporary relief, analysts warn that the long-term sustainability of this strategy is uncertain. The CBN’s ongoing monetary policies and their impact on liquidity could continue to challenge Nigerian banks, compelling them to adapt to new financing models to remain financially viable.
Source: naira metrics