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By Chinwendu Obienyi
With the broader financial system grappling with a funding shortfall, banks still deposited about N4.1 trillion with the Central Bank of Nigeria (CBN) over five days, underscoring a deepening divide in liquidity conditions.
The placements, made through the apex bank’s Standing Deposit Facility (SDF), came at a time when average system liquidity remained in deficit, highlighting how cash-rich banks are opting to earn risk-free returns rather than lend into the interbank market.
According to fixed income analysts, the trend points to persistent fragmentation in liquidity distribution, despite aggressive monetary tightening by the apex bank.
Data compiled from market reports show that the banking system recorded an average liquidity deficit of roughly N4.1 trillion during the week, an improvement from about N5.0 trillion previously. Still, the scale of deposits at the central bank signals that surplus funds remain concentrated among a handful of institutions.
The CBN has maintained a tight policy stance in recent months, deploying frequent Open Market Operations (OMO) to mop up excess liquidity and contain inflationary pressures. Last week alone, the bank conducted OMO sales exceeding N2 trillion, offset only partially by maturities and other inflows.
That backdrop has kept money market rates elevated, though relatively stable. The overnight lending rate hovered around 22 per cent, easing slightly last week as early liquidity inflows softened funding pressures. The Open Repo Rate (ORR) held steady at similar levels, suggesting that benchmark short-term rates remain firmly anchored despite shifts in liquidity.
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Analysts say the simultaneous occurrence of large-scale deposits and system-wide deficits reflects structural inefficiencies rather than an outright shortage of cash.
“Liquidity is not evenly distributed. Some banks are long and prefer to stay risk-free at the central bank, while others are borrowing at elevated rates”, they said.
Investor behavior across fixed-income markets mirrors this caution. Demand has been concentrated at the very short and longer ends of the curve, with the mid-tenor segment seeing weaker participation. At a recent OMO auction, subscriptions surged to more than four times the amount offered, with the bulk of demand directed at longer-dated instruments as investors sought to lock in yields.
Short-term instruments also attracted strong interest, reflecting the need for liquidity management amid uncertainty over policy direction and inflation. Nigeria’s March inflation rate came in slightly above expectations at 15.38 per cent, reinforcing expectations that the central bank will maintain its hawkish stance.
Despite the tightening bias, near-term liquidity conditions may improve. Analysts estimate that more than N1.6 trillion in inflows from Treasury bill maturities, bond coupon payments and maturing OMO bills could enter the system in the coming days. However, a planned N750 billion Treasury bill auction is expected to absorb part of that liquidity.
“In the absence of any mop up activity by the CBN, system liquidity is likely to expand further, buoyed by inflows from OMO maturities (N457 billion) and FGN bond coupon (N145.98 billion). This could ease funding pressures and lead to a softening in the OVN rate”, Cordros Research told investors in an emailed note.
The interplay between inflows and sterilization efforts will likely determine the direction of short-term rates, but the persistence of large deposits at the central bank suggests that liquidity segmentation will remain a defining feature of Nigeria’s money markets.
