₦4.66trn Liquidity Surplus Eases Bank Funding Pressure As Overnight Rate Falls

• Excess liquidity in Nigeria’s banking system rose to ₦4.66 trillion last week from ₦3.6 trillion, easing short-term funding pressure across banks.

• The liquidity build-up pushed the overnight lending rate down by 13 basis points to 22.13 percent, although the funding rate remained at 22 percent.

• September could see further liquidity inflows of ₦15.72 trillion, but aggressive CBN sterilisation through OMO operations could determine how much cash remains available to banks.

September 08, () — Nigeria’s money market came under less funding pressure last week as excess liquidity in the banking system climbed to ₦4.66 trillion, helping to push the overnight lending rate lower.

System liquidity increased from ₦3.6 trillion in the previous week, supported largely by banks’ placements at the Central Bank of Nigeria’s Standing Deposit Facility and inflows from maturing securities.

According to Cowry Asset Limited, about ₦4.4 trillion of the surplus was placed at the SDF, while ₦2.3 trillion in primary-market repayments further increased liquidity available to financial institutions.

Higher Liquidity Lowers Overnight Funding Costs

The liquidity build-up helped ease short-term funding costs, with the overnight rate declining by 13 basis points to 22.13 percent.

The funding rate, however, remained unchanged at 22 percent, suggesting that while liquidity conditions improved, money-market pricing remained relatively elevated.

The softer conditions came despite continued liquidity management by the CBN through Open Market Operations, with OMO settlements absorbing part of the excess cash from the financial system.

There was no reported activity at the Standing Lending Facility during the period, indicating that banks had little need to seek short-term funding from the apex bank.

The development comes after tighter money-market conditions at the end of August.

The overnight rate had risen to 23.80 percent on August 31, up 170 basis points from 22.10 percent at the end of July. The Open Repo rate also climbed to 23.25 percent from 22 percent.

Cowry Asset analysts said Nigerian Interbank Offered Rates moved higher across the curve during the period, reflecting expectations that liquidity could tighten as the CBN continued its monetary operations.

September Inflows Could Reach ₦15.72trn

Liquidity conditions could remain relatively strong this month, with the Financial Market Dealers Association projecting total system inflows of ₦15.72 trillion in September.

The projection represents a 16.1 percent increase from the ₦13.54 trillion recorded in August, with OMO maturities expected to account for about 74 percent of the projected inflows.

However, the amount of liquidity that ultimately remains in the banking system will depend heavily on how aggressively the CBN sterilises excess funds through OMO sales and other monetary operations.

The apex bank stepped up liquidity absorption in August, taking ₦4.72 trillion out of the banking system through consecutive OMO auctions, compared with ₦2.19 trillion sterilised in July.

It also settled ₦1.456 trillion in Treasury Bills on August 12, adding to the movement of funds within the financial system.

Despite the sizeable withdrawals, liquidity recovered towards the end of August following inflows from bond coupon payments and maturing securities.

CBN Operations Remain Key To Money-Market Rates

The competing forces of substantial system inflows and aggressive liquidity sterilisation are expected to remain key drivers of money-market pricing in September.

For banks, the direction of liquidity will determine how much they need to borrow from the interbank market and the cost of short-term funding.

For investors in money-market funds and other short-term fixed-income instruments, movements in interbank rates could also influence the returns available on Treasury Bills, commercial papers, fixed deposits and other short-duration assets.

With substantial OMO maturities expected in September, the key question for the market is whether the CBN allows the resulting cash inflows to remain within the banking system or recycles a significant portion through fresh sterilisation operations.

The answer could determine whether the current easing in funding pressure persists or gives way to another round of tighter money-market conditions.