Nigeria’s Banks Face Pressure as N3 Trillion Liquidity Surge Tests CBN’s Inflation Fight

Nigeria’s banking sector is swimming in cash, but analysts warn that the flood of liquidity may do more harm than good. In just two weeks, system liquidity has ballooned to N3 trillion, thanks to hefty Federal Account Allocation Committee (FAAC) disbursements, maturing Open Market Operations (OMO) instruments, and treasury bill rollovers. While this cash wave suggests financial comfort, experts say it risks destabilizing the market and complicating the Central Bank of Nigeria’s (CBN) inflation control efforts.

Too much idle money in the system can distort interest rates, weaken monetary policy, and trigger inflationary pressures. With banks holding excess cash, lending decisions may become less efficient, while the CBN could be forced into aggressive liquidity mop-ups. Such actions typically drive up borrowing costs for businesses and households, putting more pressure on an already fragile economy. “It’s like water overflowing a dam—if not controlled, it can flood the entire community,” one market analyst explained.

Last week, system liquidity closed at a net positive balance of about N2 trillion, even after the CBN and Debt Management Office (DMO) attempted to absorb the excess through OMO and treasury bill auctions. Despite these efforts, overnight lending rates remained in the high-20 percent range, suggesting that interbank funding conditions are still tight. Traders believe rates could ease if liquidity stays elevated, but expect the apex bank to step in with more auctions to prevent a complete slide.

For banks, the liquidity surge is a double-edged sword. On one hand, cheaper interbank funding lowers borrowing costs and provides room for tactical plays in government securities. On the other hand, net interest margins could be squeezed as returns from idle cash shrink. Analysts like David Adonri of Highcap Securities argue that banks may profit from trading gains if treasury bill yields fall, but warn that the CBN’s sterilization policies will ultimately dictate outcomes.

The bigger worry is for the wider economy. A liquidity surplus of N3 trillion raises the risk of inflationary spillovers, particularly if funds flow into consumer spending or foreign exchange markets. With inflation already a pressing challenge, the CBN is expected to maintain a firm grip on the system in the coming weeks. While banks may enjoy short-term comfort, the longer-term stability of Nigeria’s financial market will hinge on how decisively the apex bank manages this liquidity glut.

source: The sun