Soaring Cash Demand Squeezes Nigerian Banks Amid Tight Liquidity, Rising Interest Rates

Nigeria’s banking sector is facing mounting liquidity pressure as a surge in cash demand from both government and private players pushes institutions toward their operational limits. Industry sources report that increased government disbursements, corporate tax remittances, and heightened consumer withdrawals—partly in anticipation of rising inflation—are driving up withdrawals. In response, some banks, especially mid-tier lenders, have activated contingency liquidity measures, cut back on new loans, and even restricted large corporate withdrawals over the past two days.

Despite inflows from maturing Treasury bills (₦258 billion) and Open Market Operations (OMO) instruments (₦600 billion) last week, the financial system remains strained due to the Debt Management Office’s ₦2.1 trillion OMO sales, which absorbed excess liquidity. The tightening was reflected in the Nigerian Interbank Offered Rate (NIBOR), where the overnight rate jumped to 26.92%, while 1-, 3-, and 6-month tenors rose to 27.71%, 28.38%, and 29.14%, respectively. The Open Buy Back (OPR) rate held at 26.50%, and the Overnight (O/N) rate inched up to 27.00%, highlighting banks’ scramble for short-term funds.

The Treasury bills market is also under pressure, with yields in the secondary market climbing to an average of 17.91%, driven by weak liquidity and global risk factors. At last week’s NT-Bills auction, the Central Bank of Nigeria (CBN) offered ₦220 billion but allotted only ₦173 billion despite strong demand. Stop rates for 91-day and 182-day papers remained unchanged, but the 364-day paper rose to 16.50%. Similarly, the DMO’s ₦600 billion OMO auction drew ₦2.20 trillion in subscriptions, with ₦2.12 trillion allotted and the 245-day rate set at a steep 23.70%.

Analysts warn that the liquidity squeeze may deepen this week due to a lack of maturing government instruments, limiting fresh cash inflows into the banking system. This shortage is likely to keep upward pressure on NIBOR and other short-term lending rates, forcing banks to rely heavily on the already-strained interbank market. Cowry Asset Management noted that last week’s OMO operations drained far more liquidity than was replenished, leaving banks in a challenging funding environment.

While the Central Bank has yet to release an official statement, insiders suggest that a short-term liquidity injection could be considered if market stress intensifies. Experts caution that the current situation, while not yet a crisis, is a critical inflection point. If banks become overly conservative or fail to meet obligations, the ripple effects could spread across the economy. For now, Nigeria’s short-term money market remains a testing ground for the CBN’s inflation-control strategy and the banking sector’s resilience under tightening liquidity conditions.

Source: The sun