Nigerian banks are increasingly relying on costly short-term commercial papers (CPs) to address liquidity challenges as the Central Bank of Nigeria (CBN) enforces stringent cash reserve policies, driving up deposit costs, Bloomberg reports.
Access Holdings Plc, Nigeria’s largest bank by assets, along with at least three other financial institutions, have recently issued or are in the process of issuing commercial papers to shore up their liquidity.
The move comes as banks struggle to attract deposits amid rising costs imposed by the central bank’s monetary tightening measures.
As of January, the CBN had mopped up N26.6 trillion in liquidity after raising the cash reserve ratio (CRR) to 50% in September 2023.
The policy, aimed at curbing inflation and stabilizing the naira, has doubled the effective cost of raising deposits for banks. While the average rate for a six-month deposit stood at 19% in January, the actual cost surged to 36% due to the CRR constraints.
“Assuming the customer deposit was obtained at 18%, the effective rate will be 36%,” because of the high CRR rate, Chika Mbonu, chief executive officer of KSBC Advisory Partners Ltd., a Lagos-based consultancy, told Bloomberg. Banks only have “half of the total” deposits at their disposal, he added.
Interest Rate Hikes Exacerbate Liquidity Pressures
The CBN has raised its benchmark interest rate by 875 basis points since early 2023, pushing it to 27.5%.
Additionally, the standing lending facility rate, a key instrument for short-term liquidity management, now stands at 31.75%.
These measures have made it more expensive for banks to secure funds through traditional deposits, leading them to explore alternative financing options.
Commercial Papers Gain Preference Over Certificates of Deposit
Faced with rising wholesale deposit rates and liquidity mismatches, banks are increasingly turning to CPs as a more viable funding tool. Unlike certificates of deposit (CDs), CPs do not trigger additional CRR requirements, making them a more attractive option.
“Other banks will follow to issue commercial papers as this is one of their funding tools,” said Samuel Sule, CEO of Renaissance Capital Africa.
“Wholesale deposit rates are higher than commercial paper rates and often have shorter tenors”, making CPs a preferred option for liquidity management.
Broader Implications for the Banking Sector
The rising cost of funding and liquidity constraints could have significant implications for Nigeria’s banking sector.
Analysts suggest that the CBN’s aggressive monetary policies may continue to shape liquidity conditions in the near term.
While CP issuance provides a temporary fix, long-term sustainability will depend on the ability of banks to adapt to the evolving regulatory landscape and explore innovative financing models.
