Published 15th January, 2020
Commercial banks borrow from the Central Bank primarily to meet the reserve requirements when their cash on hand is low before the close of the business day.
To put itself back over the minimum reserve threshold, a bank borrows money from the government’s central bank utilizing what is known as the discount window.
Borrowing at the discount window is convenient because it is always available and the lending process includes no negotiation or extensive documentation. The downside, however, is the discount rate, or the interest rate at which the Central Bank lends to banks, is higher than if borrowing from another bank..
Usually, there is a required CRR (cash reserve ratio) expected of all the commercial banks to maintain with the CBN on a daily basis. It helps the CBN to monitor and ensure that banks do not abuse their liquidity status at any period!!
Therefore, most banks find themselves been short of maintaining this daily ritual with the CBN, probably because of cash withdrawals by customers or over-lending of credit facilities to customers. But to save them against running foul of the regulations, they access the discount window created to either borrow from other banks or borrowed from the CBN.
Most times, they borrow from the CBN on account of its easy access, even if it warrant higher interest rate and in the long run create yet another source of revenue for the CBN and by extension the government.
The main fear with the peculiar nature of the Nigeria Banking system is that most of this banks continue to finance supposed short-term loans to make daily requirements without really trying to pay off as their manager liquidity improves thereby creating the impression that if drastic measures are not applied, these loans may as well go toxic and seeking to be written off from our books at the detriment of the nation’s revenue.
Long Live Association of Good Governance of Nigeria (AGGN)