Banks sit on excess cash as system liquidity hits N2.1trn

By Chinwendu Obienyi

Nigerian lenders are holding record levels of excess cash as system liquidity strengthened last week, reflecting a lull in Central Bank of Nigeria (CBN) interventions and incoming government payments.

Data from Coronation Merchant Bank on Monday showed that system liquidity opened last week at N1.96 trillion and closed higher at N2.09 trillion, up from N1.64 trillion the previous week.

The strong liquidity environment supported a modest decline in the overnight (OVN) lending rate to 26.96 per cent while the Open Repo Rate held steady at 26.50 per cent. Notably, no liquidity mop-up operations were conducted by the CBN during the week.

Corroborating the trend, analysts at Cordros Research, said that the overnight rate dipped marginally by four basis points to 27 per cent, as the absence of central bank interventions left the financial system with ample cash.

The research and investment based firm, said, the banking system’s net long position, a measure of excess reserves held by banks – rose to N1.95 the trillion from N1.47 trillion in the previous week.

“The system remains net long, reflecting both the CBN’s relative inactivity in liquidity management and the timing of government inflows. Also, the system could see further liquidity boosts in the coming week, especially expected inflows from FGN bond coupon payments totaling N141.71 billion”, Cordros Research said.

Excess liquidity often puts downward pressure on short-term interest rates, benefiting banks with idle funds but potentially complicating the central bank’s monetary policy objectives. In the current environment, the CBN appears to be taking a hands-off approach, allowing liquidity to remain high while short-term rates stabilize.

Fixed income traders suggest that banks are likely to remain cautious in deploying these funds, given ongoing macroeconomic uncertainties and the CBN’s monetary policy stance.

“While surplus cash provides flexibility for banks, it also raises questions about the efficiency of credit allocation in the economy,” they said.

The strong liquidity backdrop has kept yields on short-term instruments relatively contained, even as inflation pressures persist in the broader economy. Analysts expect that unless the CBN engages in targeted mop-up operations, overnight rates are likely to remain subdued, especially with additional government cash inflows expected in the near term.

Any change in the CBN’s liquidity management stance could influence interest rates, bank lending behavior, and broader financial market conditions.

As Nigerian banks continue to sit on excess cash, the financial system is likely to maintain stability in the short term, though questions about the optimal deployment of idle funds and the transmission of monetary policy would remain in focus.