Nigeria: Money Market Rates Surge as Banks Borrow N420bn from CBN

Money market rates have surged significantly as banks increased their borrowing from the Central Bank of Nigeria (CBN) to address liquidity pressures. Deposit money banks (DMBs) accessed approximately N420 billion from the CBN’s standing lending facility this week to bolster their liquidity positions amid a tightening financial system.

This surge in borrowing marks a reversal from earlier in August when banks, flush with cash from FAAC credits, coupon payments, and maturing debt instruments, had utilized the CBN’s standing deposit facility to absorb excess liquidity. During this period, money market rates had fallen below 30% due to the robust liquidity.

However, recent data from FMDQ and analysts at Cordros Capital Limited indicate that the overnight lending rate has spiked by 791 basis points week-on-week to 34.0%. This increase followed the CBN’s FX Retail Dutch Auction debits, which totaled N1.31 trillion on Thursday. Earlier, the apex bank had injected $826 million into the forex market through authorised dealer banks on Wednesday to support liquidity.

Despite these efforts, the average system liquidity showed a net long position of N10.61 billion, contrasting with a net short position of N132.33 billion the previous week. This reflects the significant activity of DMBs at the CBN’s standing lending facility, where banks borrowed N419.87 billion during the week.

Cordros Capital Limited projects that liquidity in the financial system will remain strained this week. They expect that the sole inflow from OMO maturities, totaling N20.50 billion, will be insufficient to support system liquidity. Consequently, the overnight rate is anticipated to continue its upward trend.

System liquidity, which had remained positive for most of the week, turned negative by week’s end. Consequently, the Open Repo Rate (OPR) and the Overnight Rate (O/N) rose sharply by 778 basis points and 791 basis points, respectively, reaching 33.39% and 33.97%.

In July, the financial system experienced tight liquidity, with banks net borrowing approximately N648.6 billion from the CBN discount window, compared to a net deposit of N69.6 billion in June 2024. The Nigerian interbank offered rate also surged by 500 basis points to close at 36.71% on Friday, reflecting heightened liquidity concerns among banks.