Interest rates in Nigeria’s money market increased sharply last week as banks scrambled to secure funds to meet their financial obligations. The shortage of available cash in the banking system led to a significant rise in borrowing from the Central Bank of Nigeria (CBN), with banks collectively taking out N4.7 trillion in loans.
The liquidity crisis in the financial sector was evident as banks faced a shortfall in available funds, pushing up the cost of borrowing. Those with surplus funds saw an opportunity to lend at higher rates, taking advantage of the increased demand.
According to financial analysts, short-term interest rates rose sharply due to this surge in borrowing. TrustBanc Financial Group Limited reported that the banking system closed the week with a liquidity deficit of N315.9 billion. Though this was an improvement from the N519.5 billion deficit recorded the previous day, it still indicated a financial crunch.
As a result, the Nigerian Interbank Borrowing Rate (NIBOR) for overnight loans increased by 4.14 percentage points, reaching 32.64%. Cowry Asset Management Limited noted that banks with available liquidity sought to maximize their returns by lending at higher rates.
A major factor contributing to the liquidity squeeze was the Central Bank’s Open Market Operation (OMO) auction, which withdrew N1 trillion from the system. This outflow overshadowed incoming funds from maturing Treasury bills (N285.37 billion) and interest payments on government bonds (N154.23 billion).
Although there was temporary relief midweek when fresh inflows boosted liquidity, the effect was short-lived. The N285.37 billion from Treasury bill redemptions was not enough to significantly improve market liquidity, keeping interest rates high.
By the end of the week, the Overnight Policy Rate (OPR) had increased by 3.28 percentage points to 32.42%, while the Overnight Lending Rate climbed by 3.18 percentage points to 32.75%. Financial experts at TrustBanc Financial Group noted that the liquidity challenges were exacerbated by banks making foreign exchange-related payments.
To meet their short-term funding needs, commercial banks turned to the CBN’s Standing Lending Facility (SLF), borrowing a total of N4.72 trillion. Analysts predict that unless significant cash inflows enter the system, interest rates will remain high in the coming weeks.
