Central Bank Cash Curbs Drive Nigerian Banks to Short-Term Debt

(Bloomberg) -- Nigerian lenders are tapping expensive short-term commercial papers to plug temporary liquidity gaps as the central bank’s cash curbs raise the cost of attracting deposits from customers. 

Access Holdings Plc, Nigeria’s biggest bank by assets, and as many as three other institutions have raised or are in the process of selling short-term notes.

The Central Bank of Nigeria has sucked 26.6 trillion naira ($17.3 billion) of cash as of January after raising its reserve ratio — or the share of deposits lenders must set aside with the monetary authority — to 50% in September. While the average cost for a six-month deposit with banks was 19% as of January, the effective rate is double that because of the central bank’s move, which is aimed at slowing inflation and supporting the currency.

“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 said by phone. Banks only have “half of the total” deposits at their disposal, he said.

Banks see commercial paper as an attractive way to manage liquidity mismatches on their balance sheets after the central bank raised its key interest rate by 875 basis points since last year to a record 27.5% and increased its standing lending facility rate, an option for short-term liquidity management for banks, to 31.75%. 

“Other banks will follow to issue commercial papers as this is one of their funding tools,” to manage liquidity risk, said Samuel Sule, the CEO of Renaissance Capital Africa. “Wholesale deposit rates are higher than commercial paper rates and in most cases are for shorter tenors.” 

The financial institutions are selling CPs instead of certificate of deposit because CDs trigger CRR requirements.

The banks didn’t immediately comment on their CP programs. 

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