Nigerian Banks Face Fresh Liquidity Shift as CBN Pulls N3.31tn in OMO Bills, Putting Bank Lending in Focus

Getting your Trinity Audio player ready...

Nigerian banks woke up on October 7 with less idle cash than they had a day earlier. The Central Bank of Nigeria had just allotted N3.309 trillion in Open Market Operations (OMO) bills, and the effect showed up almost at once in the balances lenders keep at the central bank. The question for the weeks ahead is whether this shift pushes banks toward lending or simply moves their surplus into a different kind of safe asset.

The operation itself was straightforward. At its October 6 auction, the CBN offered N2 trillion and received bids worth N3.511 trillion, so demand was about 1.75 times the amount on offer. The central bank chose to accept N3.309 trillion, well above its stated target. Most of it went into the 182-day bill, which took N2.671 trillion at a stop rate of 16.92 percent, while the 147-day bill took N637.2 billion at 17.22 percent. By accepting more than it planned, the CBN signalled that it saw more cash to absorb than its initial offer implied.

The headline number needs one adjustment. Earlier OMO bills worth about N2.17 trillion fell due in the same window and returned money to the banks that held them. Subtract that, and the net withdrawal was about N1.14 trillion. The figure that matters for liquidity is the net one, because it measures how much spending power actually left the system.

Why is the central bank doing this at all? Part of the answer is price stability. Inflation was 15.39 percent in August, which is well below the 23 percent policy rate but still high enough that the CBN does not want a flood of cheap naira chasing goods and dollars. Another part is credibility around its own rate decision. On September 22, the Monetary Policy Committee cut the benchmark by 350 basis points from 26.5 percent and reset the rate corridor to +50/-300 basis points. That placed the Standing Deposit Facility rate at 20 percent and the Standing Lending Facility rate at 23.5 percent. The committee explained that the old policy rate had drifted away from where banks were actually trading with each other, which was near 22 percent. A new rate is only meaningful if short-term market rates settle somewhere close to it. Withdrawing surplus cash through OMO auctions is how the CBN pushes them in that direction.

The Cash Reserve Ratio is a related lever. It remains at 45 percent for commercial banks, 16 percent for merchant banks and 75 percent for non-TSA public sector deposits, so a large share of deposits is already unavailable for lending before any OMO sale takes place. The auction then targets what remains.

The change inside the banking system was quick. Standing Deposit Facility placements, which are the funds banks leave overnight with the CBN for interest, dropped by N941.85 billion on October 7, from N4.70 trillion to N3.76 trillion. That is close to the net N1.14 trillion drained by the auction, though the two figures measure different things and the match should not be treated as proof that one caused the other. Market reports also said the average cost of short-term funding rose by 32 basis points to 20.59 percent. In practical terms, banks that had been content to leave cash at the deposit window are now holding it in bills or moving it elsewhere, and the market price of overnight money is edging up as a result.

How does this compare with recent conditions? The deposit facility reached N7.52 trillion on September 24, two days after the rate cut, and was N5.90 trillion the next day. It rose to N6.28 trillion on September 29, fell to N4.55 trillion on September 30 and stood at N4.86 trillion on October 5. At N3.76 trillion, the October 7 level is half the September peak. The OMO figures tell a matching story. Across five auctions in September, the CBN sold about N17.51 trillion in bills while N10.89 trillion matured, a net withdrawal of around N6.62 trillion. The September 29 auction was the largest, allotting N4.69 trillion against N2.43 trillion in maturities. The October 6 sale was smaller than that, but it follows the same approach of taking in more than it returns.

So the system is less flush than it was two weeks ago, but it is not tight. N3.76 trillion in overnight deposits is still a large sum, and overnight funding costs near 20 percent sit at the bottom of the corridor, not the top. A genuinely scarce market would push rates toward the 23.5 percent lending rate. The CBN is trimming surplus cash, not draining the system.

What could this mean for bank lending? The honest answer is that it is unclear, and the numbers point both ways. In favour of more credit, banks now earn less for leaving cash at the deposit window than they did before the corridor was reset, and deposits at the facility are falling. In favour of caution, OMO bills at around 17 percent and Treasury bills at 15.85 percent for the 364-day tenor offer a risk-free return that new loans must beat. At the Treasury bill auction on October 7, the CBN offered N900 billion on behalf of the Federal Government, drew N1.77 trillion in bids and allotted N968.47 billion, which suggests investors are still happy to hold government paper. Add the 45 percent reserve requirement for commercial banks, and the space for new loans is narrow. Lenders will extend credit when borrowers look safe and offer returns that justify giving up what government securities pay. Policy changes can lower the price of money, but they cannot create creditworthy borrowers.

For households and small businesses, this means loan rates are unlikely to fall quickly. Banks reprice slowly, and many existing facilities follow terms agreed earlier. Anyone planning to borrow should compare offers across lenders and ask directly how the rate cut will affect the pricing of a new facility.

Several things deserve attention in the coming days. The first is the size of the weekly auctions compared with maturities. About N9.05 trillion in OMO bills is due this month, roughly 68 percent of expected inflows, so the CBN will have to decide how much of that to roll over. If it offers less than what matures, cash will return to banks and funding costs could ease. If it keeps accepting more than it offers, tightening will continue. The second is the daily balance at the Standing Deposit Facility, which shows how quickly banks are redeploying cash. The third is the overnight funding rate, which will show whether it moves away from the 20 percent floor. The fourth is the naira, which traded near N1,333 to the dollar on October 7 as NFEM turnover passed $1 billion the day before. A calm currency gives the central bank more room to ease liquidity without worrying about pressure on the exchange rate.

The next Monetary Policy Committee meeting is set for November 23 and 24, and inflation data due before then will show whether the case for the current stance still holds. Until then, auction results and deposit balances will be the clearest signals of whether banks are moving cash into the economy or into the safest assets available. For more coverage of the sector, visit Business Tech.

Meta Description: The CBN allotted N3.31 trillion in OMO bills on October 6, cutting bank deposits at the CBN by N941.85 billion. See what the liquidity shift means for lending.

Focus Keyword: Nigerian banks liquidity

Related 6 Keywords: CBN OMO bills, Standing Deposit Facility, CBN liquidity management, Monetary Policy Rate 23 percent, bank lending Nigeria, Cash Reserve Ratio 45 percent

Nigerian Banks Face Fresh Liquidity Shift as CBN Pulls N3.31tn in OMO Bills, Putting Bank Lending in Focus

Nigerian banks woke up on October 7 with less idle cash than they had a day earlier. The Central Bank of Nigeria had just allotted N3.309 trillion in Open Market Operations (OMO) bills, and the effect showed up almost at once in the balances lenders keep at the central bank. The question for the weeks ahead is whether this shift pushes banks toward lending or simply moves their surplus into a different kind of safe asset.

The operation itself was straightforward. At its October 6 auction, the CBN offered N2 trillion and received bids worth N3.511 trillion, so demand was about 1.75 times the amount on offer. The central bank chose to accept N3.309 trillion, well above its stated target. Most of it went into the 182-day bill, which took N2.671 trillion at a stop rate of 16.92 percent, while the 147-day bill took N637.2 billion at 17.22 percent. By accepting more than it planned, the CBN signalled that it saw more cash to absorb than its initial offer implied.

The headline number needs one adjustment. Earlier OMO bills worth about N2.17 trillion fell due in the same window and returned money to the banks that held them. Subtract that, and the net withdrawal was about N1.14 trillion. The figure that matters for liquidity is the net one, because it measures how much spending power actually left the system.

Why is the central bank doing this at all? Part of the answer is price stability. Inflation was 15.39 percent in August, which is well below the 23 percent policy rate but still high enough that the CBN does not want a flood of cheap naira chasing goods and dollars. Another part is credibility around its own rate decision. On September 22, the Monetary Policy Committee cut the benchmark by 350 basis points from 26.5 percent and reset the rate corridor to +50/-300 basis points. That placed the Standing Deposit Facility rate at 20 percent and the Standing Lending Facility rate at 23.5 percent. The committee explained that the old policy rate had drifted away from where banks were actually trading with each other, which was near 22 percent. A new rate is only meaningful if short-term market rates settle somewhere close to it. Withdrawing surplus cash through OMO auctions is how the CBN pushes them in that direction.

The Cash Reserve Ratio is a related lever. It remains at 45 percent for commercial banks, 16 percent for merchant banks and 75 percent for non-TSA public sector deposits, so a large share of deposits is already unavailable for lending before any OMO sale takes place. The auction then targets what remains.

The change inside the banking system was quick. Standing Deposit Facility placements, which are the funds banks leave overnight with the CBN for interest, dropped by N941.85 billion on October 7, from N4.70 trillion to N3.76 trillion. That is close to the net N1.14 trillion drained by the auction, though the two figures measure different things and the match should not be treated as proof that one caused the other. Market reports also said the average cost of short-term funding rose by 32 basis points to 20.59 percent. In practical terms, banks that had been content to leave cash at the deposit window are now holding it in bills or moving it elsewhere, and the market price of overnight money is edging up as a result.

How does this compare with recent conditions? The deposit facility reached N7.52 trillion on September 24, two days after the rate cut, and was N5.90 trillion the next day. It rose to N6.28 trillion on September 29, fell to N4.55 trillion on September 30 and stood at N4.86 trillion on October 5. At N3.76 trillion, the October 7 level is half the September peak. The OMO figures tell a matching story. Across five auctions in September, the CBN sold about N17.51 trillion in bills while N10.89 trillion matured, a net withdrawal of around N6.62 trillion. The September 29 auction was the largest, allotting N4.69 trillion against N2.43 trillion in maturities. The October 6 sale was smaller than that, but it follows the same approach of taking in more than it returns.

So the system is less flush than it was two weeks ago, but it is not tight. N3.76 trillion in overnight deposits is still a large sum, and overnight funding costs near 20 percent sit at the bottom of the corridor, not the top. A genuinely scarce market would push rates toward the 23.5 percent lending rate. The CBN is trimming surplus cash, not draining the system.

What could this mean for bank lending? The honest answer is that it is unclear, and the numbers point both ways. In favour of more credit, banks now earn less for leaving cash at the deposit window than they did before the corridor was reset, and deposits at the facility are falling. In favour of caution, OMO bills at around 17 percent and Treasury bills at 15.85 percent for the 364-day tenor offer a risk-free return that new loans must beat. At the Treasury bill auction on October 7, the CBN offered N900 billion on behalf of the Federal Government, drew N1.77 trillion in bids and allotted N968.47 billion, which suggests investors are still happy to hold government paper. Add the 45 percent reserve requirement for commercial banks, and the space for new loans is narrow. Lenders will extend credit when borrowers look safe and offer returns that justify giving up what government securities pay. Policy changes can lower the price of money, but they cannot create creditworthy borrowers.

For households and small businesses, this means loan rates are unlikely to fall quickly. Banks reprice slowly, and many existing facilities follow terms agreed earlier. Anyone planning to borrow should compare offers across lenders and ask directly how the rate cut will affect the pricing of a new facility.

Several things deserve attention in the coming days. The first is the size of the weekly auctions compared with maturities. About N9.05 trillion in OMO bills is due this month, roughly 68 percent of expected inflows, so the CBN will have to decide how much of that to roll over. If it offers less than what matures, cash will return to banks and funding costs could ease. If it keeps accepting more than it offers, tightening will continue. The second is the daily balance at the Standing Deposit Facility, which shows how quickly banks are redeploying cash. The third is the overnight funding rate, which will show whether it moves away from the 20 percent floor. The fourth is the naira, which traded near N1,333 to the dollar on October 7 as NFEM turnover passed $1 billion the day before. A calm currency gives the central bank more room to ease liquidity without worrying about pressure on the exchange rate.

The next Monetary Policy Committee meeting is set for November 23 and 24, and inflation data due before then will show whether the case for the current stance still holds. Until then, auction results and deposit balances will be the clearest signals of whether banks are moving cash into the economy or into the safest assets available. For more coverage of the sector, visit Business Tech.