The Central Bank of Nigeria (CBN) has seen a significant rise in bank borrowings, with a 171% increase month-on-month (MoM) from N9.15 trillion in January 2025 to N24.81 trillion in February 2025. This surge highlights the ongoing liquidity issues within the interbank money market, driven by the CBN’s tight monetary policy aimed at controlling inflation. To address the liquidity squeeze, banks have increasingly relied on two short-term lending facilities from the CBN: the Standing Lending Facility (SLF) and the Repurchase (Repo) agreement.
The SLF lends money to banks at an interest rate 500 basis points above the Monetary Policy Rate (MPR), while the Repo arrangement involves the purchase of banks’ securities with an agreement to sell them back at a later date, usually for a higher price. At the same time, the CBN also accepts deposits from banks through its Standing Deposit Facility (SDF), where banks receive interest at MPR minus 100 basis points. However, deposits through this facility dropped by 50% MoM to N4.65 trillion in February 2025.
This sharp increase in borrowing reflects the ongoing challenges posed by the CBN’s tight monetary stance, which includes a series of interest rate hikes aimed at curbing inflation. The central bank has opted to retain the MPR and other monetary policy rates after six consecutive increases. Additionally, the CBN continues its liquidity management by selling Open Market Operations (OMO) treasury bills, with N1.39 trillion worth of OMO TBs sold in February 2025, a 39.5% rise from the previous month.
As liquidity in the banking sector becomes increasingly strained, the cost of borrowing in the interbank money market has surged. The average interest rate for Collateralized lending (OBB) rose sharply to 32.5% in February 2025, up from 27.5% in January. This escalating cost of funds has been a direct result of the monetary tightening measures and the heightened demand for liquidity in the banking system.
SOURCE: VANGUARD