The Central Bank of Nigeria (CBN) has announced a significant adjustment to the remuneration structure for deposits placed with it by commercial banks, raising the interest rate on the Standing Deposit Facility (SDF) to 26.5%.
This represents a sharp increase from the previous 19% applied to large deposits exceeding N3 billion.
The policy shift, communicated via a circular dated November 29, 2024, comes as part of the decisions taken during the 298th meeting of the Monetary Policy Committee (MPC).
At the meeting, the MPC opted to retain the asymmetric corridor around the Monetary Policy Rate (MPR) at +500/-100 basis points, while also abolishing the second-tier structure of the SDF.
Excerpts of the circular
At the 298th meeting of the Monetary Policy Committee (MPC), the Committee retained the Asymmetric Corridor at +500/-100 around the MPR and removed the 2″ tier of the Standing Deposit Facility (SDF) of 19% on deposits above 3billion.
The SDF will now be remunerated on a single tier basis which is currently Monetary Policy Rate (MPR) minus 100 basis points. Consequently, all SDF will be remunerated at the prevailing SDF rate of 26.50%. This circular supersedes the earlier circular on the Asymmetric.
Corridor indicated below:
Superseded Circular: Ref: Subject: FMD/DIR/PUB/CIR/001/017, dated August 26, 2024 OPERATIONALISATION OF THE STANDING DEPOSIT FACILITY (SDF) SYMMETRIC CORRIDOR All Authorised Dealers are required to take note of this new development.
This circular takes immediate effect.
Simplified remuneration framework
Previously, the SDF operated on a two-tier basis, with deposits of up to N3 billion remunerated at MPR minus 100 basis points, while amounts exceeding N3 billion were remunerated at a significantly lower rate of 19%.
- However, under the new framework, the CBN has streamlined the system by implementing a single-tier rate for all deposits.
- The new rate is pegged at MPR minus 100 basis points, resulting in an effective rate of 26.5%, as the current MPR stands at 27.5%.
- If the MPR increases further than 27.5% then the policy suggest the new rate will be MPR minus 1%.
This adjustment represents a 7.5 percentage point increase for deposits exceeding N3 billion, aligning them with the same remuneration rate as smaller deposits.
Why this matters
The adjustment highlights the CBN’s strategy to enhance liquidity management within the banking system while incentivizing banks to hold excess cash with the apex bank.
- By equalizing the rates for all deposits, the CBN removes disincentives for placing large sums in the SDF, potentially increasing participation.
- This decision also represents a rollback of the previous policy where the CBN accepted deposits at a rate of 19% for amounts above N3 billion.
- Under the old system, banks were unintentionally discouraged from using the SDF window as the returns were significantly lower than those from risk-free securities, which offered yields of about 30%.
- By removing the second tier and increasing deposit rates, the CBN has eliminated this disincentive, making the SDF more attractive for banks looking to park excess liquidity.
This policy adjustment is consistent with the MPC’s hawkish stance, which has seen the MPR remain elevated at 27.5%.
It complements recent decisions to maintain a high MPR, signaling the apex bank’s continued focus on curbing inflationary pressures.
The asymmetric corridor retained at +500/-100 basis points ensures that the cost of borrowing from the CBN remains significantly higher than the return on deposits, further discouraging speculative liquidity movements.
Implications for banks
The removal of the second tier effectively makes the SDF more attractive for banks with surplus liquidity, as they now stand to earn higher returns on large deposits. This could lead to:
- Banks may choose to park more excess funds with the CBN rather than deploying them into the interbank market or extending loans.
- While higher deposit rates could improve bank revenues, they may also reduce incentives for lending, especially if loan rates fail to match the returns offered by the CBN.
- The move may help the CBN mop up excess liquidity in the banking system, contributing to its inflation-control objectives.