Banks deposit N5.2trn at 26.50 percent interest amid liquidity crunch

IN a surprising move that underscores the complexity of Nigeria’s monetary environment, Nigerian banks deposited a total of ₦5.2 trillion with the Central Bank of Nigeria (CBN) at a 26.50 percent interest rate despite facing significant liquidity constraints.

The deposits were made under the Standing Deposit Facility (SDF), which offers a fixed interest rate calculated as the Monetary Policy Rate (MPR) minus 100 basis points. With the MPR currently at 27.50 percent, the SDF rate stands at 26.50 percent. Interestingly, this is lower than the Standing Lending Facility (SLF) rate of 31.75 percent, which banks use to access short-term funds from the CBN. Analysts say this trend reflects a preference among banks for risk-free returns over more volatile lending or investment options, even in a tight liquidity environment.

System liquidity saw a 43.9 percent month-on-month decline in March, falling from ₦1.3 trillion to ₦735.1 billion. This came despite substantial inflows from primary market repayments (₦4.1 trillion) and SLF (₦16.5 trillion), which outpaced outflows from primary market sales (₦3.1 trillion), SDF (₦5.2 trillion), and Open Market Operation (OMO) sales (₦1.7 trillion).

The Central Bank also conducted four Nigerian Treasury Bills (NTB) and two OMO auctions during the month to manage excess liquidity. NTB yields rose across tenors, with 91-day, 182-day, and 364-day bills closing at 18.0 percent, 18.5 percent, and 19.9 percent, respectively. Mid and long-term OMO instruments were the only ones attracting subscriptions, as the CBN withdrew ₦1.7 trillion to combat inflation and exchange rate volatility.

SLF activity surged in fourth quarter (Q4) 2024, with total transactions reaching ₦44.83 trillion, up from ₦27.95 trillion in Q3. The daily average also increased to ₦0.73 trillion. Conversely, transactions at the SDF window dipped slightly to ₦15.00 trillion, though daily averages inched up to ₦0.24 trillion.

According to an investment banking group, Afrinvest (West) Africa Limited, average system liquidity declined in Q4 2024, mainly due to CBN monetary operations such as SLF repayments, Cash Reserve Ratio (CRR) debits, NTB and OMO sales, and FX-OMO settlements. The average net industry balance dropped by 6.25 percent to ₦0.15 trillion, compared to ₦0.16 trillion in the previous quarter.

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