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By Chinwendu Obienyi
Commercial banks deposited a staggering N3.67 trillion in the Central Bank of Nigeria’s (CBN) Standing Deposit Facility (SDF) on Dec. 24, a dramatic jump from N2.47 trillion just a day earlier, highlighting persistent excess liquidity in the financial system even after aggressive policy efforts to mop up cash.
The SDF, which pays a lucrative overnight interest rate, has become a preferred destination for surplus liquidity at a time when credit demand remains weak and economic uncertainty persists.
However, the surge comes on the heels of a N1.7 trillion liquidity mop-up through Open Market Operations (OMO) which was conducted by the CBN on Dec. 22, part of a broader strategy to tighten monetary conditions and curb inflationary pressures.
Yet the rapid re-emergence of excess cash suggests these efforts have been only partially effective, with banks flush with deposits and reluctant to deploy them into riskier lending.
Analysts say the spike partly reflects seasonal rebalancing as financial institutions reposition their books before the year-end holiday, but also points to deeper structural issues in Nigeria’s credit markets. With interest rates elevated and risk premiums high, banks are increasingly favouring safe, high-yield instruments such as the SDF over traditional lending to businesses and households.
“Banks are showing a clear preference for secure overnight returns rather than pushing funds into an environment where credit demand is subdued and risk remains elevated. It is a reflection of both liquidity abundance and lending reluctance”, they said.
The CBN’s data show that banks’ opening account balances at the regulator also rose alongside SDF placements, adding to the picture of ample system liquidity. This abundance has been reinforced over recent months by the repayment of maturing OMO bills and a slowdown in net issuances.
Despite mopping up more than N11.2 trillion in OMO bills since November, with nearly equivalent repayments, cash has continued to flood back into the system.
The CBN has signalled a shift toward “passive” liquidity management, relying more on standing facilities than frequent short-term debt issuances, a strategy aimed at reducing its own interest payment obligations. But analysts caution that without stronger credit uptake from banks, the trickle of liquidity into the real economy will remain limited.
Hence, the banking sector’s behaviour also has implications for broader monetary policy. While the SDF provides an attractive risk-free return, it does little to stimulate economic growth. “High SDF placements suggest that the monetary transmission mechanism is weak, policy tightening is not translating into credit growth”, they said.
Some industry observers expect the CBN to resume more aggressive OMO operations to manage system liquidity, support foreign exchange stability, and influence inflation dynamics. But with banks already sitting on large cash buffers, the central bank faces a delicate balancing act between tightening monetary conditions and maintaining financial stability.
