Thursday, July 11, 2019 /10:52AM / By ARM Research
Late yesterday, the Central Bank of Nigeria delivered another news to commercial banks, which now comes in form of a voluntary rejection of excess liquidity deposited by the banks to CBN via the Standing Deposit Facility (SDF). The facility had served as a liquidity mop-up mechanism for the apex bank without necessarily issuing government securities in return to the banks. Prior to November 2014, banks could deposit as much liquidity at their disposal with CBN and be remunerated for same. CBN capped the minimum remunerated deposit through the window at N7.5 billion in November 2014, however banks could keep excess at their discretion without being remunerated.
With the new framework, the allowable daily deposit through the SDF that will now be remunerated is now capped at N2 billion at the applicable MPR minus 500bps (8.5%). We believe the new structure further suggests the apex banks drive to persuade banks to lend to the real sector.
Notably, during periods of excess liquidity in the banking system and the accompanied depression in interbank rates, the SDF window afforded banks (especially top 4 Tier 1 banks who are perpetual net placers of funds) an avenue for placing excess liquidity in the absence of OMO or Treasury bills auctions and earn annualized rate of 8.5%. Notwithstanding, we believe the impact on income for the Top 4 Tier 1 banks (GTB, ZENITH, UBA and FBNH) will minimal as we expect such funds to be redirected to the Tier 2 banks which had been perpetual net takers at the Standing Lending Facility, albeit at a much lower rate depending on overall market liquidity.
Although, we do not perceive CBN will be comfortable leaving excess liquidity with the banks, as such could result in speculation at the foreign exchange market, but it is hard to reason borrowing of same funds via OMO and T’bills at higher rates from same banks.