In an intriguing development for Nigeria’s financial landscape, Access Holdings Plc, recognized as the country’s largest bank by assets, is partaking in short-term note sales alongside up to three other financial institutions. This strategic move comes on the heels of the Central Bank of Nigeria (CBN) implementing significant monetary policies that have withdrawn a staggering ₦26.6 trillion (approximately $17.3 billion) from circulation as of January. The CBN’s decision to elevate the reserve ratio to 50% last September has fundamentally altered the banking environment.

The Impact of High Reserve Ratios

As of January, banks are offering an average interest rate of 19% for six-month deposits. However, due to the central bank’s actions, the effective rate is nearly double, reaching around 36%. Chika Mbonu, CEO of KSBC Advisory Partners Ltd., emphasizes that banks are only able to utilize "half of the total" deposits due to the stringent Cash Reserve Ratio (CRR) requirements. This scenario has created a pressing need for banks to reevaluate their liquidity management strategies.

Rising Interest Rates and Liquidity Management

The CBN’s aggressive monetary policy has resulted in an 875 basis point hike in the key interest rate over the past year, now standing at a record 27.5%. This increase, coupled with a rise in the standing lending facility rate to 31.75%, has pushed banks to consider commercial paper (CP) as an effective mechanism for addressing liquidity mismatches. Samuel Sule, CEO of Renaissance Capital Africa, notes that other banks are likely to follow suit with their own commercial paper offerings, as this method of funding can mitigate liquidity risks more efficiently than traditional deposit certificates.

The Shift from Certificates of Deposit

In light of the current economic climate, banks have opted for issuing commercial papers instead of certificates of deposit (CDs). This shift is strategic, as CDs incur additional CRR requirements that complicate liquidity management. The banks have yet to provide detailed comments on their commercial paper programs, but the trend indicates a significant adaptation to the evolving financial landscape.

• Key Takeaways:
  • Access Holdings Plc and others are selling short-term notes.
  • CBN has withdrawn ₦26.6 trillion from the market.
  • Average six-month deposit rates are around 19% but effectively reach 36%.
  • The key interest rate has surged to 27.5%.
  • Commercial papers are being favored over certificates of deposit.

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