BUSINESS
Overnight lending rate drops amid introduction of new banking instruments
Following the spike to almost 100 per cent at the mid of last week, the nation’s overnight lending rate on Fridaydropped to 12 per cent, due to a liquidity squeeze as lenders paid for hard currency and treasury bills purchased from the Central Bank of Nigeria (CBN), traders have disclosed.
This is even as the central bank in a bid to aid liquidity management and deepen the financial system, introduced two new financial instruments known as – Funding for Liquidity Facility (FfLF) and Intra-day Facility (IDF), at its window, for access by non-interest financial institutions (NIFIs) under its regulation.
However, the money market rates on Thursday moderated after the state disbursed N224.54 billion ($715.10m) in budget allocations to its three tiers of government, boosting liquidity.
Similarly, the apex bank also repaid around N95.7 billion in matured treasury bills, to boost liquidity, as well sold around N26.90 billion at an open market treasury auction on Friday to soak up naira liquidity. Traders said the money market remained liquid despite the auction.
Although, trader expected rates to rise up to 30 per cent this week as the central bank issues more securities to mop up part of government disbursement from the banking system.
However, the central bank in a circular signed by its Director, Financial Markets Department, Dr. Alvan Ikoku, which was obtained on its official website over the weekend, stated that the FfLF would provide liquidity facility on overnight basis only and to be terminated on next business day.
Other features include: “Authorised non-interest financial institutions to provide eligible securities to the CBN as collateral for the facility. The value of the collateral to be maximum of 110 per cent of the value of the facility. For example, if a NIFI wishes to take a FfLF of N10 billion, it would be required to provide eligible security collateral worth N11 billion.
“The CBN shall specify acceptable collaterals from time to time. These shall include, but not limited to the following securities: CBN safe custody account (CSCA) deposit, CBN non-interest note (CNIN), CBN Asset-backed security (CBN-ABS). Sukuk (that has received status from the CBN, warehouse receipts as provided in the CBN Act 2007, and any other collateral designated by the CBN that does not contravene the CBN guidelines for NIFI’s operations.
On the other hand, it listed some of the features of the IDF to include that the CBN would provide an IDF for settlement, on same day business while authorised NIFI are expected to provide eligible securities as collateral for the facility.
Meanwhile, to meet its core objectives of price stability, the apex bank in seven months, has mop-up estimated N2.9 trillion excess liquidity using the Open Market Operations (OMO) auctions. Checks has it that the introduction of Investors & Exporters Foreign Exchange and Small and Medium Scale enterprises (SMEs) windows, the OMO sales operation has doubled since in April and reached record high of about N779.4 billion in July.
Further findings, showed that the CBN auctioned N491.5bn OMO in January, but dropped to N407.5bn in February. According to the CBN, OMO sales have attracted rates between 17.5 per cent and 18.5per cent, a move to keep the foreign exchange stable. So, to deter pressure on the foreign exchange, the CBN sucks out naira from the economy by offering high interest rates believing that the more naira you have available to chase dollars, the lower the depreciation of the naira.
The CBN not only uses OMO but Treasury Bills and Federal Government’s Bonds to stem inflationary pressure and curtail liquidity arising from maturing bills.
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