A significant liquidity squeeze in the interbank money market has led to a sharp increase in banks’ borrowings from the Central Bank of Nigeria (CBN). Data reveals that banks’ borrowing from the CBN surged by 171% month-on-month (MoM) to N24.81 trillion in February 2025, up from N9.15 trillion in January 2025.
The CBN provides short-term lending facilities to banks through two primary channels: the Standing Lending Facility (SLF) and Repurchase (Repo) agreements. Under the SLF, the CBN lends to banks at an interest rate of 500 basis points (bps) above the Monetary Policy Rate (MPR). Meanwhile, the Repo arrangement involves the CBN purchasing banks’ securities with an agreement to sell them back at a predetermined date and price.
Conversely, the CBN also accepts deposits from banks through its Standing Deposit Facility (SDF), offering an interest rate of MPR minus 100 bps. However, banks’ deposits with the CBN through the SDF declined by 50% MoM to N4.65 trillion in February 2025, down from N9.31 trillion in January 2025.
The sharp rise in banks’ borrowings from the CBN is attributed to the apex bank’s tight monetary policy, aimed at curbing persistent inflationary pressures. Despite maintaining the Monetary Policy Rate (MPR) and other monetary policy parameters during its recent Monetary Policy Committee (MPC) meeting, the CBN had previously raised the MPR six consecutive times.
Additionally, the CBN intensified its liquidity management efforts by conducting regular Open Market Operations (OMO), selling treasury bills (TBs) to absorb excess liquidity. In February 2025, the CBN sold N1.39 trillion worth of OMO TBs, marking a 39.5% increase from the N1 trillion sold in January 2025.
The liquidity crunch also drove up the cost of funds in the interbank money market. The average interest rate on Collateralized (Open Buy Back, OBB) lending rose to 32.5% by the end of February 2025, compared to 27.5% at the end of January 2025.
This development underscores the challenges faced by financial institutions amid the CBN’s efforts to stabilize the economy and control inflation, even as it continues to attract mixed reactions from stakeholders.
