Interbank Rates Surge Due To Cash Shortage In Banks

Nigerian Banks Limit Dollar Deposit To $5,000 Monthly

At the start of the week, Nigeria’s banking system experienced a liquidity crunch, meaning there wasn’t enough cash in the system to meet financial needs.

This happened because the Central Bank of Nigeria (CBN) conducted an Open Market Operation (OMO) auction, where it sold financial securities to banks. As a result, banks had to pay a significant amount of money to the CBN, reducing the cash available for daily transactions.

Due to this cash shortage, interest rates in the money market shot up. According to data from the Financial Market Dealers Quotations (FMDQ) platform, short-term borrowing costs for banks rose sharply, with the Nigerian Interbank Offered Rate (NIBOR) increasing significantly.

Other key rates in the financial system also increased. The Open Repo Rate (OPR), which banks use for short-term borrowing, went up by 2.83% to 32.07%, while the Overnight Lending Rate, the cost banks pay to borrow money overnight, rose by 3.01% to 32.64%.

The liquidity crunch was mainly caused by the massive N1 trillion settlement banks had to make for the OMO auction last Friday. This was far greater than the N24.4 billion banks received from bond coupon payments. In simple terms, banks paid out a lot more money than they received, leading to a cash shortage.

To make matters worse, banks also had to set aside funds for the Cash Reserve Ratio (CRR), which further drained liquidity. Analysts believe that unless there is a fresh inflow of funds into the system, interbank rates will remain high.

Investment firm Afrinvest Limited reported that overall banking system liquidity fell from a deficit of ₦236.3 billion in December to a deeper deficit of ₦307.5 billion in January. However, banks’ borrowing needs were slightly reduced due to FAAC allocations (monthly funds shared with states and local governments) amounting to ₦1.4 trillion.

At the start of the month, the CBN also conducted another OMO auction worth ₦500 billion. Due to these tight liquidity conditions, both the open repo and overnight lending rates increased by 1.8% month-on-month, closing at 29.1% and 29.6%, respectively.