Banks are relying more on CBN’s Standing Deposit Facility
Recent figures released by the Central Bank of Nigeria (CBN) reveal ongoing liquidity pressures within the nation’s banking system, signalling tighter financial conditions and funding constraints across the sector. On September 30, the opening balances of banks and discount houses declined sharply to ₦297.6 billion, compared to ₦338.9 billion recorded just a day earlier. This significant drop underscores the growing difficulty banks face in maintaining sufficient liquidity buffers. In response, financial institutions increasingly turned to the CBN’s Standing Deposit Facility (SDF), with utilisation rising steeply to ₦5.54 trillion—up from ₦5.39 trillion on September 29 and ₦3.73 trillion on September 26.
Despite the CBN’s liquidity support measures, pressures persisted. The apex bank injected ₦731.1 billion into the financial system through maturing Open Market Operations (OMO), yet this intervention failed to ease dependence on overnight borrowing. The data highlights deeper structural stress in the system, where lower opening balances mean banks begin the trading day with reduced liquidity reserves. This situation forces them to rely heavily on the SDF window for short-term funding, thereby pushing up interbank rates and increasing the overall cost of funds. The ripple effect often extends to households and businesses, as banks may pass on these higher costs through elevated lending rates, potentially constraining credit growth and investment activity.
The persistence of tight liquidity conditions, even after a major OMO inflow, suggests that systemic factors rather than short-term fluctuations are driving the strain. Analysts point to the aggressive Cash Reserve Requirement (CRR) debits imposed by the CBN, as well as the absence of statutory inflows from the Federation Account Allocation Committee (FAAC), as key contributors to the liquidity crunch. These factors limit the amount of cash available for interbank transactions and weaken banks’ ability to support economic activities. As liquidity tightens, financial institutions face a trade-off between maintaining regulatory compliance and meeting market funding needs, a challenge that can distort the broader credit environment.
To address these pressures, experts argue that the CBN may need to review and recalibrate its liquidity management strategy. Easing the burden of CRR debits, for instance, or timing liquidity injections to coincide with periods of elevated demand could provide banks with greater operational flexibility. Such an approach would reduce the sector’s dependence on emergency borrowing windows, help stabilise short-term interest rates, and improve the flow of credit to productive sectors of the economy.
Failure to adopt a more responsive liquidity management framework could prolong financial tightening, undermining monetary policy transmission and weakening the overall stability of Nigeria’s banking system. Ensuring a balance between monetary control and financial flexibility remains crucial for fostering confidence, promoting lending, and sustaining economic recovery. (Source: Central Bank of Nigeria)
