Short-term interest rates in Nigeria’s banking system have increased due to a shortage of available cash in the financial market. This is largely due to the recent settlement of Nigerian Treasury Bills (NTB), which drained liquidity from the system.
On Wednesday, the government conducted an NTB auction, selling Treasury bills to investors in exchange for cash. Since a large amount of money was taken out of circulation to pay for these bills, banks found themselves with less available cash, leading to higher borrowing costs.
As a result, banks turned to the Central Bank of Nigeria’s (CBN) lending facility to borrow money and meet their short-term funding needs. Analysts noted that most of the borrowing came from mid-sized (tier-2) banks, while larger banks with more cash reserves took advantage of the situation by lending at higher rates.
A financial report from CardinalStone Limited revealed that the NTB auction drained about N670 billion from the financial system. This led to banks borrowing a total of N1.02 trillion from the CBN’s discount window.
Due to this cash shortage, key money market interest rates moved higher. The Open Repo Rate (OPR) increased by 0.19% to 32.29%, while the overnight lending rate (which banks charge each other for short-term loans) rose by 0.65% to 32.65%.
Going forward, analysts expect that money market rates will remain high, especially as banks prepare for another round of FX settlements on Friday, when the CBN is expected to release $11.5 million to commercial banks. This could further tighten liquidity in the financial system.
