Commercial banks’ deposits with the Central Bank of Nigeria (CBN), known as Standing Deposit Facility (SDF) has dropped by 95.82 percent in less than two months due to cash crunch, occasioned by the Federal Government’s approved naira redesign.
Data from the CBN’s website shows that banks’ deposit with their regulator (CBN) dropped to N4.69 trillion as of April 4, 2023 from N112.24 billion in February 10, 2023, the extended timeline for the return of high value naira.
Standing facilities (deposit and lending) are instruments of liquidity management, according to the CBN. They serve as avenues to invest surplus funds overnight and to square up whenever the system is short at the end of each business day.
On October 26, 2022, the Central Bank of Nigeria (CBN) announced that the high Naira value of N200, N500 and N1,000 would be redesigned and introduced into the economy from December 15, 2022 while commercial banks were directed to return existing denominations to the CBN.
“Poorly executed Naira redesign policy led to a cash crunch across Nigeria,” said analysts at FSDH Research in a new report.
The public had until the deadline of January 31 (extended to February 10 and 17) to return the old currency to commercial banks. The CBN also limited over-the-counter cash withdrawal to N100,000 and N500,000 per week for individual and corporate organisations, respectively.
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This was subsequently increased to N500,000 and N5,000,000 respectively. New Naira notes were printed but were not circulated effectively. This created panic among citizens as the old notes were declared to no longer be legal tender.
“Many individuals have lost trust in several banks due to sub-optimal performance of payment platforms and rationing of cash withdrawal, ” the FSDH report said.
Muda Yusuf, chief executive officer The Centre for the Promotion of Private Enterprise (CPPE), said the cash crisis experienced by bank customers had a profound impact on their confidence regarding cash deposits.
He said it would take some time for this confidence to be restored, adding that the agony of being dispossessed of one’s cash and resultant negative effects on the welfare and livelihoods of citizens cannot be forgotten in a hurry.
“The reality is that the cash situation is yet to normalise. Though the scarcity has eased, cash availability is still an issue. Until the cash supply gets to a saturation point, it will be difficult to convince the citizens to deposit their cash in the banks.
“This is one of the unintended consequences of the poorly implemented cash redesign policy of the CBN. What we are witnessing is the exact opposite of what the cash-less policy was meant to achieve. There is likely to be an increase in the amount of cash held outside the banking system. But we could see a reversal if access to cash eases considerably,” Yusuf said.
According to Taiwo Oyedele, head of tax and corporate advisory services at PwC Nigeria, as a result of how the CBN went about the currency redesign and the cashless economy, one of the consequences as some commentators have described it is inadvertently unbanking the bank.
“If a customer had to go through so much trouble to access their hard earned deposit with banks unsuccessfully in many cases even for the most basic of needs like food and medicines, it should be expected that they will not be in a hurry to take their cash to the banks anytime soon. The situation was further compounded by the unstable and epileptic electronic payment system which was inadequate to bridge the gap suddenly created by the Naira scarcity.
“This experience not only reverses some of the gains we have made regarding financial inclusion, it may negatively affect credit creation in the economy especially over the short to medium term. Addressing the problem will require the CBN to consistently inject sufficient cash into the system in order to restore confidence and get the people to have faith in banking again,” he said.