Kayode Tokede

Amid excess liquidity in the financial sector, banks and merchant banks borrowing from the Central Bank of Nigeria (CBN) dropped by 12.84 per cent to N65.53 trillion in seven months of 2025 compared with N75.18 trillion borrowed in seven months of 2024.

According to the “Financial Data” released by the CBN, banks and merchant banks deposit, however, grew significantly by 671.2 per cent to N79.84 trillion in seven months of 2025 as against the N10.35 trillion deposited in seven months of 2024.

Banks and merchant banks access lending from the apex bank using the Standing Lending Facility (SLF) window and deposit excess cash with the apex bank using the Standing Deposit Facility window (SDF).

The CBN lends money to banks and merchant banks through the SLF at an interest rate of 500 basis points (bpts) above the Monetary Policy Rate (MPR), accepts deposits from banks and merchant banks through its SDF and pays an interest rate of MPR minus 100 basis points.

The Monetary Policy Committee (MPC) of CBN since November 2024 hike MPR to 27.50 per cent from 27.25 per cent in the bid the tackle inflation and stabilize Naira at the foreign exchange market.

However, the MPR has remained at 27.50 per cent since the beginning of 2025.

In 2024, the CBN shifted to a single-tier remuneration structure for the SDF. Previously, deposits up to a certain threshold, for example N3 billion, earned a higher interest rate, while amounts exceeding that threshold earned a lower rate.

With the policy, the banks and merchant banks deposit with CBN increased significantly to N38.12 trillion, about 210.15 per cent increase when compared to N12.29 trillion in 2023.

The CBN governor, Mr. Olayemi Cardoso had disclosed that the apex bank removed the cap on the remunerable SDF to increase activity in the SDF window and manage liquidity.

 In a circular addressed to DMBs, CBN said the SDF will now be 26.5 per cent. This represents a sharp increase from the previous 19per cent. The policy change was communicated through a circular issued by the Director of the Financial Markets Department, CBN, Omolara Duke.

The circular instructed all authorised financial institutions to acknowledge and implement the updated structure, which supersedes the previous framework.

CBN had maintained that the strong patronage at the SDF confirmed healthier liquidity in the banking system, stressing that banks and merchant banks were in search of better yields.

The current inflation rate in Nigeria (22.22 per cent as of June 2025) is above yield on Treasury bills (T-Bills) and banks are looking for risk-free investments, which SDF has provided since the MPR hike of 2024.

Commenting on the development, Investment Banker & Stockbroker, Tajudeen Olayinka, attributed the surge in banks deposit with CBN to uncertainty in the business environment over rising insecurity, among others.

According to him, “The most significant factor is the increasing level of threat in the environment of business in Nigeria, arising from: insecurity, supply chain problems, rising inflation and poor purchasing power, low level of productivity, rising unemployment, liquidity overhang and paucity of risk-free financial instruments.

“As a result, most banks prefer to be debited by CBN for running short of LDR limit, as against extending credit to businesses that are finding it difficult to survive. It is all about managing risk.”

In addition, the Chief operating officer of InvestData Consulting Limited, Mr. Ambrose Omordion added that CBN is the last resort where DMBs deposit excess liquidity that comes with an attractive yield.

He explained that, “When a bank goes to borrow from CBN, it is a sign the bank is having liquidity challenges. The latest report by CBN revealed stability in the banking sector and most of them have a strong capital base to lend to the real sector and expand.

“The LDR policy of CBN is meant to encourage banks to lend to the real sector and of recent, the private sector lending has witnessed a trajectory and a bit of disruption due to a hike in global interest has slowed down customers borrowing from the banks. The hike in interest rate has impacted the cost of funds which is expected to change the direction on who banks lend to customers.

“For me, the improvement in deposit with CBN is a sign that these banks have enough liquidity and are taking preventive measures to checkmate Non-performing Loans (NPL). In addition, the high interest of seven per cent depositing with CBN is also another alternative for banks to make more money and improve on profitability.”

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