"CBN Tightens Monetary Policy with Stricter Penalties and Higher Lending Rates: A New Era of Financial Discipline"

The Central Bank of Nigeria (CBN) has maintained the five percent penalty for participants who fail to settle their Intraday Liquidity Exposures (ILEs) by the close of business. In such instances, the system will automatically convert the ILE into a Standing Lending Facility (SLF), which will incur a higher penal rate of 36.75 percent. This policy aims to enforce discipline among market participants and ensure timely settlements.

Additionally, the CBN has reintroduced the practice of rediscounting instruments pledged by participants as collateral, applying the penal rate as per the approved repurchase (repo) guidelines. This move is expected to enhance financial discipline among banks and other financial institutions.

Authorized dealers are now required to submit their SLF requests through the Scripless Securities Settlement System (S4) between 5:00 PM and 6:30 PM. This designated time frame is intended to facilitate efficient processing and prevent system disruptions.

The reinstatement of the SLF, following significant adjustments made by the Monetary Policy Committee (MPC), reflects the CBN's focus on tightening monetary policy. The MPC recently increased the upper corridor around the Monetary Policy Rate (MPR) to 5.00% from 1.00%, a measure aimed at curbing inflationary pressures and stabilizing the economy.

Alongside changes to the SLF, the CBN has issued a circular outlining modifications to the Standing Deposit Facility (SDF). For Commercial and Merchant Banks, deposits up to N3 billion will now attract a 25.75 percent rate, with excess deposits above this threshold charged at 19.00 percent. Similarly, for Payment Service Banks, deposits up to N1.50 billion will attract the 25.75 percent rate, while excess deposits will be subject to the 19.00 percent rate.

These changes are a direct result of the MPC’s decision to adjust the Asymmetric Corridor around the MPR to +500/-100 basis points, up from the previous +100/-300 basis points, in accordance with sections 12 and 30 of the CBN Act 2007.

The immediate impact of these adjustments is expected to be felt across the banking sector, with higher borrowing costs likely leading to tighter liquidity conditions. Banks may need to reassess their short-term funding strategies in light of the higher SLF rate, while the adjustments to the SDF could influence how financial institutions manage their excess reserves.

The CBN's decision to enforce stricter penalties and reintroduce collateral execution demonstrates its commitment to ensuring that financial institutions adhere to prudent risk management practices. As these new guidelines take effect, market participants will need to navigate the tighter monetary environment with caution.

The CBN's circulars are effective immediately, and all authorized dealers are required to comply with the newly outlined regulations.