The Nigerian economy is currently marked by significant movements within the financial system, more specifically on the side of banking institutions. Indeed, recent figures show a considerable increase in borrowings by banks from the Emergency Lending Facility of the Central Bank of Nigeria (CBN), as well as a dramatic increase in deposits by banks in the Deposit Standing Facility of the CBN.
According to the CBN’s financial data for the month of September 2024, banks’ borrowings through the Emergency Lending Facility increased by 117.2% from the previous month to N7.82 trillion, compared to N3.6 trillion in August 2024. On the other hand, banks’ deposits in the Deposit Standing Facility grew by a staggering 400% month-on-month, from N790.87 billion in August 2024 to N3.97 trillion in September 2024.
This notable increase in deposits in the SDF follows the CBN’s hike in interest rates, thereby enabling banks to make additional gains on their deposits. Indeed, in a directive issued on August 26, 2024 following the Monetary Policy Committee (MPC) meeting, the CBN adjusted interest rates upwards as part of its efforts to control inflation by managing excess liquidity in the financial system. The SDF rate was raised to 25.75% while the SLF rate was raised to 31.75%.
However, this restrictive monetary policy comes with some challenges for real sector businesses, including exacerbating the difficulties associated with high interest costs, currency volatility and energy costs. Analysts point out that this rate hike could weigh on the profitability of businesses and impact their ability to invest and innovate.
Despite the recent downward trend in inflation, the CBN’s decision to raise interest rates reflects its determination to contain inflation, particularly in the face of persistently high core inflation. This cautious stance is aimed at maintaining financial stability while supporting economic growth. The anticipation of a possible slowdown in the rate hike cycle at the committee’s next meeting in November suggests a strategic pause to assess the impact of previous measures and strike a balance between fighting inflation and stimulating economic growth.