Banks keep N4.54trn with CBN as cash piles up in financial system

By Chinwendu Obienyi

Nigerian banks deposited an average of N4.54 trillion with the Central Bank of Nigeria (CBN) last week as excess cash in the banking system continued to rise.

The amount is 29 per cent higher than the N3.52 trillion banks kept with the apex bank the previous week, showing that lenders had more money than they needed for day-to-day operations.

The deposits were made through the CBN’s Standing Deposit Facility (SDF), a platform that allows banks to earn interest by safely keeping surplus funds with the central bank.

Banks received large inflows from maturing government securities, customer deposits and other sources, leaving them with excess funds.

Instead of rushing to lend the money to other banks or customers, which carries some risk, they chose the safer option.

Many banks were also cautious ahead of the CBN’s Monetary Policy Committee (MPC) meeting. Rather than commit funds before knowing whether interest rates would change, they preferred to wait.

Figures obtained by the Daily Sun showed that although the CBN withdrew about N3.70 trillion from the banking system through Open Market Operations (OMO) and another N1.19 trillion through Treasury Bills sales, fresh cash flowed back into the system as earlier OMO investments matured and other funds were released.

As a result, the banking system still ended the week with more cash than it needed. Excess liquidity rose to an average of N4.44 trillion, up from N4.10 trillion a week earlier.

Because banks had enough money available, the cost of borrowing among themselves remained low. The overnight lending rate, which measures what banks charge each other for short-term loans, dropped slightly to 22.1 per cent from the previous week.

Analysts said the large amount banks kept with the CBN suggests they chose to play safe by parking excess cash with the central bank instead of lending it aggressively in the interbank market. This cautious approach also reflected expectations ahead of today’s meeting of the Monetary Policy Committee (MPC), where interest rate decisions are made.

The abundance of cash was also reflected in the Treasury Bills market. Investors showed strong interest, especially in the 364-day Treasury Bill, with demand far exceeding the amount offered by the CBN.

Analysts said many investors were eager to lock in current yields before the MPC announces its policy decision, in case interest rates change in the coming months.

Trading in the secondary Treasury Bills market also remained positive as investors continued to buy government securities, causing yields to decline slightly across most maturities.

Market analysts expect liquidity to remain strong in the coming weeks as more OMO investments mature and the Federal Government pays interest on its bonds.

However, they noted that the Federal Government’s upcoming bond auction could absorb part of the excess cash in the system, although it is unlikely to create any serious shortage of funds.

According to the analysts, unless inflation rises sharply or the CBN introduces tougher measures to withdraw cash from the financial system, banks are expected to continue keeping large sums with the apex bank because there is still plenty of money circulating within the banking sector.