Excess Liquidity: Banks Stick to Risk-Free Bets to Boost Earnings
The short-term benchmark interest rate climbed as deposit money banks (DMBs) continue to party hard in the money market for favourable premiums on risk-free investments.
Banks were seen rotating funds across the standing deposit facility (SDF), where they earn 22.50%, increasing bets on One year Nigerian Treasury bills for a 17.95% spot rate and 215 day OMO bills for 19.45%.
These money market investment securities, which have become an alternative to growing private sector loans, offer banks the opportunity to grow earnings without taking significant lending risks with deposit money.
Some analysts said lending in Nigeria has become a gamble, and many commercial lenders have taken note of the fact that since Nigeria’s contractionary economic policy, the default rate has increased. Interbank rates increased as the market recorded liquidity moderation as a result of the Central Bank of Nigeria (CBN) primary market actions.
The authority embarked on an aggressive liquidity mop-up as a result of additional inflows that lifted excess funds in the money market, hovering around N4.30 trillion on Tuesday after the CBN failed to allot OMO bills to investors despite N1.3 trillion subscription.
The market recorded inflows from OMO and Treasury bills but allotment weighed higher, reducing system liquidity by about N483 billion week on week.
Buoyed by banks placement with the CBN, system liquidity opened at about N3.27 trillion last week but moderated to N2.72 trillion as outflow relating to the CBN open market operation and Treasury bills auctions outweigh inflows.
Reflecting sizeable liquidation conditions, open and overnight lending rates closed range bound at 22.72% and 22.50% respectively.
At the auction last week, the authority offered N750.00 billion but allotted N788.20 billion across the standard tenors. The CBN also conducted an OMO auction on Thursday where it offered N600.00 billion but allotted N1.32 trillion across the 180 and 215-day tenors.
These auctions with a total allotment totalling N2.18 trillion was debited against the excess funds in the money market from active players’ separate accounts. Hence, local banks’ deposit placement with the CBN closed strong despite the fact that funds rotated into OMO, and Treasury bill auctions.
Specifically, banks’ placements at the standing deposit facility averaged ₦3.24 trillion, according to TrustBanc Financial Group, up 27% from ₦2.54 trillion in the prior week.
On Wednesday last week, financial system liquidity surged to N4.30 trillion, supported by inflows of N1.07 trillion from OMO maturities and a N124.47 million bond coupon.
In the latter of last week, a negative net flow resulting from CBN auction auctions (N788.20 billion and N1.32 trillion, respectively) against a Treasury bill inflow of N512.00 billion reduced system liquidity to N2.13 trillion.
The decline in liquidity prompted an increase in average funding rates by 2 basis points to 22.63%, with the open repo rate closing flat at 22.50%, while the overnight lending rate inched up by 4 bps to 22.75%.
The market expects N537.75 billion from the 16-Dec-2025 OMO maturity and additional inflows of N70.88 billion to boost system liquidity in the new week.
Also, there will be outflow with respect to N700 billion in Nigerian Treasury bills auction, which is expected to reduce system liquidity, which depends on midweek auction allotment.
In addition, the market anticipates pressure on liquidity to increase over N460 billion bond auction schedule for Monday. Still, liquidity is expected to remain buoyant in the coming week, barring substantial outflows MTN Nigeria Hits 52-Week High as Investors Double Down Bets
