The banking system ended the week with a significant liquidity deficit of N1.32 trillion, causing short-term interest rates in the money market to rise. The shortage of funds in the financial system pushed up key lending rates, affecting the cost of borrowing for banks.
Financial analysts reported that despite the maturity of a N50 billion Open Market Operation (OMO) bill and the gradual absorption of the N1.72 trillion Federation Account Allocation Committee (FAAC) inflow, liquidity remained tight.
As a result, the Overnight Nigerian Interbank Borrowing Rate (NIBOR) jumped by 2.14 percentage points over the week, reaching 30.68%, according to Cowry Asset Limited. Other key rates also increased, with the open repo and overnight lending rates rising by 33 and 34 basis points, settling at 27.09% and 27.67%, respectively.
TrustBanc Financial Group Limited explained that the liquidity shortfall was driven by settlements related to the OMO bills and the cash reserve ratio policy of the Central Bank of Nigeria (CBN). The heavy demand for government securities, coupled with increased funding needs, deepened the banking sector’s liquidity crisis in the absence of sufficient inflows.
At the start of the week, system liquidity was healthy at N582.95 billion, boosted by bond coupon payments totaling N279.29 billion. By Thursday, inflows from a Nigerian Treasury Bills (NTB) auction worth N467.07 billion further improved liquidity, raising it to approximately N1.52 trillion.
However, the settlement of N1.68 trillion in OMO auction debits completely wiped out these inflows, pushing the banking system into a liquidity deficit. This marked the first time in five days that the system moved into negative territory.
As a result, short-term interest rates surged, with the overall average system liquidity remaining in a net short position. Analysts predict that unless significant inflows come into the system, interbank rates will remain high in the coming week.
