More borrowing, a sign of liquidity problems in smaller banks – Experts

The Chief Economist/Head, Investment Research of PanAfrican Capital Holdings, Mr Moses Ojo, attributed the increase in the SLF to the low liquidity of some of the commercial banks.

He noted that most tier-three commercial banks had borrowed heavily from the apex bank to square up their daily business activities.

He said, “The factors that accounted for this is mainly the low level of liquidity of some of the commercial banks in the country.

“While some of the operators have a strong liquidity base, while others are struggling.  “The operators in this category are mostly in the third-tier class in the banking sector.”

He explained further that, “The weaknesses in the liquidity base of these operators led to them to be seeking cover from the regulator during  the period.”

The Managing Director, Highcap Securities Limited, Mr David Adnori, attributed the development to the banks lending to the real sector and customers, which eventually impacted on credit to the private sector that closed November at N26.41tn from N25.8tn reported in October.

According to him, since the rate of borrowing from the CBN around 15.50 per cent and lending to customers at 30 per cent, the margin to commercial bank seems lucrative and profitable.

He said, “Commercial banks are the major ones accessing the SLF window.  They borrow from the  CBN and on-lend it to their customers and the real sector.

“Take, for instance, the commercial banks borrow funds through the SLF window at 15.50 per cent and lend it to their customers at the range of 25-30 per cent. These commercial banks have made a profit margin of eight per cent which is a profitable business.”

Also commenting, a research analyst at Investment One Financial Services Limited, Mr Abayomi Ajayi, said the 73 per cent increase in the SLF last year was due to the liquidity challenges in the sector.

He said, “The increase may have been the impact of the prevailing liquidity conditions in the banking system witnessed in 2019.”

Ajayi added,  “As we know, the CBN retained its tight stance on monetary policy in its bid to maintain price stability and check inflation.

“Most of the lending from the CBN would have gone to tier II banks as they felt the brunt more during the period.”