Interbank Rates Decline As FAAC Disbursements Boost Banking Liquidity

FAAC Disbursement

The Nigerian banking system experienced a significant reduction in liquidity pressures following the latest disbursements from the Federal Accounts Allocation Committee (FAAC). These inflows provided much-needed financial relief to the banking sector, easing funding constraints and lowering short-term interest rates.

Decline in FAAC Disbursements

FAAC allocations, which represent the revenue distributed to the three tiers of government—federal, state, and local—saw a notable decline in January 2024. The total disbursed amount dropped by 17.5% from the previous month, falling to N1.42 trillion from N1.73 trillion in December 2023. This decline was largely attributed to a strengthening of the naira in December, which impacted exchange rate gains from foreign-related revenue sources. In December, the naira appreciated by 6.6% month-on-month, strengthening to N1,563.47 per US dollar compared to N1,667.41 per US dollar in November.

Furthermore, domestic oil production saw a decline, reducing government revenue from the petroleum sector. Given that FAAC disbursements play a crucial role in injecting liquidity into the financial system, this reduction had implications for the money market.

Impact on Interbank Rates

With the increase in available funds from FAAC allocations, banks experienced a reduction in the need for borrowing, leading to a decline in interbank lending rates. Money market indicators reflected this trend:

  • The Overnight Policy Rate (OPR) fell by 36 basis points (bps) to 26.58%.
  • The Overnight Rate (O/N) declined by 50 bps, settling at 27.00%.

The easing of funding pressures allowed banks to maintain higher liquidity levels, reducing the cost of borrowing in the interbank market. This trend is expected to continue into February as additional inflows further boost liquidity.

Outlook for February

Looking ahead, analysts anticipate a liquidity-rich environment in February, with an estimated N3.5 trillion expected to flow into the banking system. This includes proceeds from maturing government securities such as bonds, Treasury bills, and Open Market Operation (OMO) bills.

Unless a significant economic event disrupts the current trend, interbank rates are expected to remain stable at these lower levels. Market participants will closely monitor future FAAC disbursements, exchange rate movements, and oil production levels, as these factors will continue to influence liquidity conditions and interest rates in the financial system.

With a well-funded banking sector, businesses and individuals could benefit from more accessible credit, potentially supporting broader economic activities in the months ahead.