Banks with Funding Obligations Seek Liquidity Support–Analysts Note

Short-term benchmark interest rates spiked above 20% market as local deposit money banks with sizeable funding obligations are seeking liquidity to shore up their positions.

The liquidity level in the financial system has been unstable due to increased activities in the market amidst an expectation of higher inflow from the Federal Accounts Allocation Committee. The debit for primary market auction by the debt office has deflated liquidity, causing funding rates to spike.

While cash-rich financial institutions in the country continue to seek higher rates to part with their funds or take excess deposits to the Central Bank of Nigeria’s standing lending facility, others are raising funds to cover gaps. 

The apex bank recently lifted the restriction on the amount local banks can place in its standing deposit facility. The regulatory decision has allowed cash-rich banks choice as per how to channel their excess funds.

Responding to an enquiry, analysts told MarketForces Africa that most tier-2 capital lenders fall into a liquidity deficit in the equation. Most Tier-1 banks are noted to have a backup from cheap deposit levels in their books.

In the money market, there was a notable 2.25% day-on-day increase in the Overnight Nigerian interbank Offer Rate (NIBOR), reaching 18.94%, indicating liquidity strain as interbank lending faced pressure, Cowry Asset Limited said in its market update.

The investment firm explained that rates jerked up as Banks with funding obligations continued seeking liquidity. However, the 1-month, 3-month, and 6-month NIBOR rates saw decreases to 14.88%, 15.48%, and 16.46%, respectively, analysts said.

Data from the FMDQ platform showed that the open repo rate (OPR) and overnight lending rate (OVN), saw an increase on Thursday, closing at 20.20% and 21.00%, respectively.  Nigeria Eurobond Slumps after CBN Resumes OMO Auction