Home Cover Story  Banks struggle with liquidity squeeze as overnight rate hits 10 month high

 Banks struggle with liquidity squeeze as overnight rate hits 10 month high



Godwin Emefile, CBN Governor

Central Bank of Nigerian’s (CBN) decision to debit banks for foreign exchange bids has caused liquidity challenge in the country’s financial sector as overnight lending rate increased to 10 month high on Wednesday.

Overnight rate spiked to 53.08 per cent on Wednesday from 37.42 per cent the previous day, which is the high it has reached since April 2017 when it got to 64.58 per cent.

Open Buy Back (OBB) rate also leaped 48.04 per cent to 53.00 per cent from 35.80 per cent on Tuesday.

The CBN’s recent mandate to banks with balances at the Standing Lending Facility (SLF) window to fund their positions or risk having their bills rediscounted also put pressure on lenders’ liquidity.

“It’s due to CBN’s debits for FX bids. It will reduce soon,” explained Tunde Mabawonku, chief financial officer, Wema Bank in a text message to Business Hallmark.

Overnight and OBB rates have been on the increase since February 2, rising 1013.45 per cent and 1283.81 per cent by Wednesday.

Akintoye Ayorinde, analyst, Afrinvest (W/A) Ltd explained that the surge in interbank call rates was an indication that banks are under severe pressure to meet their liquidity positions.

“Some of these of the banks are not actually liquid. And with CBN mopping up liquidity from the system, this is also causing tightening in the banking industry,” Moses Ojo, research analyst, Panafrican Capital Plc told Business Hallmark. “When FAAC allocation for February is released, this pressure would ease.”

The apex bank failed to carry out Open Market Operations (OMO) it proposed for Wednesday, in order not to further compound the liquidity squeeze it the financial market.

“We have about N65 billion maturities coming into the system tomorrow. This would ease rate,” said Oluseyi Akinbi, head, securities trading, Zedcrest Capital Ltd. “We also see the CBN float an auction tomorrow to moderate.”

The federal government has promised to cut down its local debts as it planned to issue a $5.5 billion Eurobond from which $3 billion would be used to refinance local debts.