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Nigeria’s banking system recorded a significant increase in excess liquidity last week, easing funding pressure on financial institutions and pushing overnight borrowing rates lower.
System liquidity rose to N4.66tn from N3.6tn in the previous week, supported by increased placements by banks at the Central Bank of Nigeria’s (CBN) Standing Deposit Facility (SDF) and inflows from maturing securities.
According to Cowry Asset Limited, banks placed about N4.4tn of the surplus with the SDF, while N2.3tn in primary market repayments provided additional liquidity to the financial system.
Excess liquidity drives down overnight rate
The increase in available funds helped moderate short-term funding costs, with the overnight rate falling by 13 basis points to 22.13 per cent.
The Open Buyback (OBB) rate, however, remained unchanged at 22 per cent.
The softer money-market conditions occurred despite continued liquidity management by the CBN through Open Market Operations (OMO), with OMO settlements absorbing part of the excess cash available within the banking system.
No activity was recorded at the Standing Lending Facility during the period, suggesting that banks had limited need to obtain short-term emergency funding from the apex bank.
September inflows expected to strengthen liquidity
Liquidity conditions could remain relatively favourable this month, with the Financial Market Dealers Association projecting system inflows of N15.72tn in September.
The projection represents a 16.1 per cent increase from the N13.54tn recorded in August.
OMO maturities are expected to account for approximately 74 per cent of the projected inflows. However, the eventual liquidity position will depend largely on the extent to which the CBN absorbs excess funds through OMO sales and other monetary-policy operations.
The central bank intensified liquidity sterilisation in August, withdrawing N4.72tn from the banking system through a series of OMO auctions, compared with N2.19tn sterilised in July.
The CBN also settled N1.456tn in treasury bills on August 12, adding to liquidity movements during the month.
Despite the sizeable withdrawals, system liquidity recovered towards the end of August, supported by inflows from bond coupon payments and maturing securities.
Money-market rates remain sensitive to CBN operations
The latest decline in overnight funding costs follows a period of tighter liquidity conditions towards the end of August.
The overnight rate climbed to 23.80 per cent on August 31, representing a 170-basis-point increase from 22.10 per cent at the end of July.
The Open Repo rate also rose to 23.25 per cent from 22 per cent. Cowry Asset analysts said Nigerian Interbank Offered Rates increased across the curve, reflecting expectations of tighter liquidity as the CBN continued its monetary operations.
The competing impact of sizeable system inflows and aggressive liquidity sterilisation is therefore expected to remain a major driver of money-market pricing in the coming weeks.
Liquidity outlook important for short-term investors
For investors in money-market funds and other short-duration fixed-income instruments, changes in interbank rates could influence returns on treasury bills, commercial papers, fixed deposits and similar assets.
With substantial OMO maturities expected in September, the direction of system liquidity will depend significantly on whether the CBN allows the resulting inflows to remain within the banking system or absorbs a sizeable portion through fresh sterilisation operations.
The balance between liquidity injection and monetary-policy tightening will therefore remain critical to funding conditions and short-term interest rates across Nigeria’s financial markets.
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