Banks turn to CBN’s lending window as interbank demand stalls

By Chinwendu Obienyi

Nigeria’s banking system is awash with cash, but muted demand in the interbank market last week pushed banks to park idle balances at the Central Bank of Nigeria’s (CBN) Standing Lending Facility (SLF), Daily Sun learnt at the weekend.

This underscores the growing disconnect between liquidity surpluses and real credit demand. The SLF is a liquidity management tool which is provided by the CBN that allows deposit money banks (DMBs) to borrow or deposit short term funds with the apex bank, usually on an overnight basis.

Money market liquidity had opened the week on a buoyant note, with balances above N1.7 trillion. This was further bolstered by more than N300 billion in Open Market Operations (OMO) maturities, N2.2 trillion in Federation Account Allocation Committee (FAAC) inflows, and N79 billion in treasury bill maturities. 

An additional N200 billion OMO repayment contributed to the build-up, thus the system’s net long position averaged N2.36 trillion, up from N1.94 trillion in the prior week.

Yet, instead of spurring activity in the interbank market, the glut of liquidity saw banks lean on the CBN’s window to deposit surplus cash, highlighting the limited appetite for short-term borrowing between lenders, with the interbank market reflecting muted credit demand.

The surge in liquidity did little to shake funding rates. The Overnight Nigerian Interbank Offered Rate (NIBOR) held steady at 26.83 per cent, while the one-month tenor eased by 11 basis points (bps). The three-month and six-month benchmarks edged up slightly by 2bps and 10bps, respectively. The Overnight Policy Rate (OPR) was unchanged at 26.50 per cent, while the Overnight rate closed marginally lower at 26.95 per cent.

In contrast, the Nigerian Interbank Treasury Bills True Yield (NITTY) curve saw a sharp downward adjustment, pressured by renewed investor demand and this week’s treasury bill issuance aimed at mopping up excess liquidity. Rates dropped by 83bps, 124bps, 106bps, and 128bps across the one-month, three-month, six-month, and one-year maturities to 15.82%, 16.41%, 17.63%, and 19.27% respectively.

The secondary treasury bills market moved in the opposite direction, experiencing mild selling pressure that pushed average yields higher by 130bps to 18.48 per cent. The NTB auction of September 17, 2025, underscored the strength of investor appetite, with total subscriptions hitting N1.59 trillion against an offer of N290 billion. The 91-day and 182-day papers cleared at 15.00 per cent and 15.30 per cent, but most of the demand was directed at the one-year instrument.

Bids for the 364-day bill reached N1.48 trillion compared with an offer of N200 billion, highlighting investors’ preference for longer-dated, higher-yielding paper. The CBN eventually allotted N272.50 billion at a clearing rate of 16.78 per cent.

Analysts say the strong subscription figures reflect both the depth of system liquidity and the hunt for safe, high-yielding assets amid broader market uncertainties. Furthermore, they noted that they expect liquidity to remain buoyant, supported by maturities worth about N1 trillion, including N800 billion in OMO bills and N201.37 billion in treasury bills.

They forecast that funding rates, particularly at the short end, are likely to ease further as the market continues to absorb excess cash through auctions and secondary trading.

“Barring any liquidity management measures by the CBN, we envisage further moderation in the Overnight rate, underpinned by a persistently liquid financial system”, Cordros Research stated.

They pointed to upcoming inflows from FGN bond coupon payments, OMO maturities and NTB maturities as key drivers that will keep liquidity elevated and interbank rates subdued.

The CBN’s next move will be closely watched, as its liquidity management operations will determine whether the current glut is sustained or tapered. For now, the trend of banks parking idle funds at the regulator’s window suggests that while liquidity is abundant, the interbank market remains sluggish, raising fresh questions about the transmission of monetary policy in a persistently cash-heavy system.