Nigeria: Derivative and Contractor Inflows Ease Interbank Rate Pressures

The Nigerian interbank market experienced relief as liquidity inflows from derivatives, contractors, and other sources improved the banking system’s balance, easing short-term interest rates. By the close of trading on Friday, benchmark rates fell below 30%, reversing earlier tightening trends in the financial markets.

Liquidity Strain and Relief

Despite a challenging start to the week, with deposit money banks scrambling for funding amidst reduced inflows from matured debt instruments, the market witnessed significant relief. Tight liquidity had initially forced banks to increase borrowing from the Central Bank of Nigeria’s (CBN) Standing Lending Facility (SLF), with withdrawals surging from ₦435.20 billion to ₦722.02 billion within a day.

This surge in borrowing led to a liquidity deficit of ₦40.18 billion earlier in the week. However, by Friday, the banking system closed with a robust balance of approximately ₦403.83 billion, supported by inflows from derivatives transactions, signature bonuses, and other CBN disbursements, according to a note by TrustBanc Financial Group Limited.

Mid-Week Liquidity Challenges

The system’s liquidity fluctuated significantly last week. The Central Bank’s cash reserve ratio (CRR) debits drained ₦596 billion from the banking system early in the week, moving the financial system from a pre-Christmas surplus of ₦123.71 billion into a deficit by Tuesday.

Analysts observed that despite Federal Accounts Allocation Committee (FAAC) disbursements, cash reserve requirements constrained liquidity, exerting upward pressure on rates earlier in the week.

Inflows Drive Recovery

As the week progressed, inflows totaling ₦600 billion—comprising contractor payments and coupon settlements—bolstered the system’s liquidity. This recovery shifted the banking system’s average daily balance from a previous deficit of ₦867.7 billion to a surplus of ₦162.5 billion.

TrustBanc Financial Group reported that this improved liquidity reduced interbank funding rates. The Open Buy Back (OBB) and Overnight (O/N) rates declined significantly, closing at 26.50% and 27.11%, respectively, representing a drop of over 500 basis points.

Outlook for Interbank Rates

Analysts project that interbank funding rates will remain stable in the coming week, barring unexpected significant outflows. AIICO Capital Limited noted that late settlements from a Treasury bills auction could lead to a temporary dip in liquidity at the start of the week.

“Barring unforeseen outflows, we expect the current liquidity balance to hold steady, keeping funding rates at current levels,” analysts remarked.

As liquidity inflows continue to stabilize the banking system, stakeholders will monitor the impact of CBN policies and other market dynamics to gauge future rate movements.