Interest rates in Nigeria’s interbank market have increased sharply due to a shortage of available cash in the financial system. This is mainly because of large money outflows linked to foreign exchange (FX) swap deals and borrowing activities by banks using the Central Bank of Nigeria’s (CBN) emergency lending facility.
As banks scrambled for funds, many of them also invested in Nigerian Treasury Bills while simultaneously trying to settle their outstanding FX swap obligations. This increased the demand for cash, pushing up interbank lending rates.
According to financial market data from FMDQ, the overnight lending rate surged by 3.42 percentage points to 32%, while the open buy-back (repo) rate jumped by 3.50 percentage points to 31.50%. These increases reflect how much liquidity has dried up in the banking system.
Investment analysts at CardinalStone Limited noted that the market is now in a negative balance, meaning there is more demand for cash than supply. This is largely due to the draining effect of FX swaps and increased borrowing from the CBN’s lending facility.
At the same time, banks are trying to meet their funding needs ahead of a Nigerian Treasury Bill auction worth ₦670 billion, making the liquidity squeeze even tighter. Analysts predict that short-term interest rates will continue to rise as banks settle payments for these government securities.
A report by Cowry Asset Limited confirmed that interbank lending rates increased due to tight liquidity conditions in the banking system. However, AIICO Capital Limited expects relief soon, as banks are set to receive a credit inflow of ₦285.37 billion from maturing Treasury Bills, which could ease the pressure and bring rates down.
Looking at the broader picture, system liquidity has worsened significantly over the past two months. Cowry Asset Limited reported that liquidity in Nigeria’s money market dropped from a deficit of ₦236.3 billion in December 2024 to a deeper negative balance of ₦307.5 billion in January 2025.
Analysts say this decline was mainly caused by:
- A ₦1.42 trillion allocation from the Federation Account Allocation Committee (FAAC), which temporarily reduced banks’ need to borrow.
- The CBN’s Open Market Operation (OMO) auction, where ₦500 billion was withdrawn from circulation to control inflation.
With these liquidity pressures in play, interbank rates may remain high in the short term unless significant cash inflows ease the situation.
