CBN raises rates of interest for deposits it will get from business banks to 26.5% from 19%

The Central Bank of Nigeria (CBN) has introduced a major adjustment to the remuneration construction for deposits positioned with it by business banks, elevating the rate of interest on the Standing Deposit Facility (SDF) to 26.5%.

This represents a pointy enhance from the earlier 19% utilized to giant deposits exceeding N3 billion.

The coverage shift, communicated through a round dated November 29, 2024, comes as a part of the selections taken through the 298th assembly of the Financial Coverage Committee (MPC).

On the assembly, the MPC opted to retain the uneven hall across the Financial Coverage Price (MPR) at +500/-100 foundation factors, whereas additionally abolishing the second-tier construction of the SDF.

Excerpts of the round

On the 298th assembly of the Financial Coverage Committee (MPC), the Committee retained the Uneven Hall at +500/-100 across the MPR and eliminated the two″ tier of the Standing Deposit Facility (SDF) of 19% on deposits above 3billion.

The SDF will now be remunerated on a single tier foundation which is at present Financial Coverage Price (MPR) minus 100 foundation factors. Consequently, all SDF shall be remunerated on the prevailing SDF charge of 26.50%. This round supersedes the sooner round on the Uneven.

Hall indicated beneath:

Outdated Round: Ref: Topic: FMD/DIR/PUB/CIR/001/017, dated August 26, 2024 OPERATIONALISATION OF THE STANDING DEPOSIT FACILITY (SDF) SYMMETRIC CORRIDOR All Authorised Sellers are required to pay attention to this new growth.

This round takes rapid impact.

Simplified remuneration framework

Beforehand, the SDF operated on a two-tier foundation, with deposits of as much as N3 billion remunerated at MPR minus 100 foundation factors, whereas quantities exceeding N3 billion have been remunerated at a considerably decrease charge of 19%.

• Nevertheless, below the brand new framework, the CBN has streamlined the system by implementing a single-tier charge for all deposits.
• The brand new charge is pegged at MPR minus 100 foundation factors, leading to an efficient charge of 26.5%, as the present MPR stands at 27.5%.
• If the MPR will increase additional than 27.5% then the coverage counsel the brand new charge shall be MPR minus 1%.

This adjustment represents a 7.5 share level enhance for deposits exceeding N3 billion, aligning them with the identical remuneration charge as smaller deposits.

Why this issues

The adjustment highlights the CBN’s technique to boost liquidity administration throughout the banking system whereas incentivizing banks to carry extra money with the apex bank.

• By equalizing the charges for all deposits, the CBN removes disincentives for putting giant sums within the SDF, probably growing participation.
• This determination additionally represents a rollback of the earlier coverage the place the CBN accepted deposits at a charge of 19% for quantities above N3 billion.
• Beneath the previous system, banks have been unintentionally discouraged from utilizing the SDF window because the returns have been considerably decrease than these from risk-free securities, which provided yields of about 30%.
• By eradicating the second tier and growing deposit charges, the CBN has eradicated this disincentive, making the SDF extra enticing for banks seeking to park extra liquidity.

This coverage adjustment is per the MPC’s hawkish stance, which has seen the MPR stay elevated at 27.5%.

It enhances current choices to take care of a excessive MPR, signaling the apex bank’s continued deal with curbing inflationary pressures.

The uneven hall retained at +500/-100 foundation factors ensures that the price of borrowing from the CBN stays considerably greater than the return on deposits, additional discouraging speculative liquidity actions.

Implications for banks

The elimination of the second tier successfully makes the SDF extra enticing for banks with surplus liquidity, as they now stand to earn greater returns on giant deposits. This might result in:

•  Banks might select to park extra extra funds with the CBN fairly than deploying them into the interbank market or extending loans.
• Whereas greater deposit charges might enhance bank revenues, they could additionally cut back incentives for lending, particularly if mortgage charges fail to match the returns provided by the CBN.
• The transfer might assist the CBN mop up extra liquidity within the banking system, contributing to its inflation-control targets.