By Kehinde Ibrahim, Lagos
NIGERIA’S banking industry witnessed a remarkable shift in liquidity management during 2025, with commercial banks channeling unprecedented volumes of excess cash into the Central Bank of Nigeria, CBN, instead of relying on the apex bank for emergency funding. The development reflects one of the strongest liquidity positions recorded in the country’s banking sector in recent years and underscores the significant impact of monetary reforms implemented by the CBN over the past two years.
However, beyond the impressive figures lies a broader economic question. While stronger liquidity signals a healthier financial system capable of withstanding market shocks, analysts argued that the true measure of success is whether the surplus cash eventually finds its way into productive sectors of the economy. With businesses still grappling with high borrowing costs and limited access to affordable credit, concerns remain that improved banking liquidity may be benefiting the financial system more than Nigeria’s real economy.
Data contained in the Central Bank of Nigeria’s 2025 Annual Report showed that average daily placements by Deposit Money Banks, DMBs, into the Standing Deposit Facility, SDF, rose dramatically to N1.36 trillion in 2025 from N153.87 billion recorded in 2024.
The increase represented almost a ninefold jump and occurred across 247 transaction days during the year, highlighting the abundance of excess liquidity within the banking system.
The Standing Deposit Facility allows banks with surplus cash to deposit their funds with the apex bank overnight while earning interest. It serves as one of the CBN’s key monetary policy instruments for managing excess liquidity and maintaining stability within the financial system.
The surge in deposits also translated into significantly higher earnings for commercial banks.
According to the report, the CBN paid an average of N1.36 billion daily as interest on the placements in 2025, compared with an average of N150 million paid in 2024. This represented a substantial increase in returns earned by banks simply from parking excess liquidity with the apex bank.
At the same time, the opposite side of the CBN’s liquidity management window recorded a notable decline in activity.
The Standing Lending Facility, SLF, through which eligible commercial banks obtain short-term liquidity support from the central bank, experienced lower demand throughout the year.
Average daily requests through the facility, including conversions from the Intraday Liquidity Facility, declined to N426.90 billion across 162 transaction days in 2025 from N541.13 billion across 240 transaction days recorded in the preceding year.
The reduction in borrowing also lowered the interest costs incurred by banks.
Average daily interest payments on funds borrowed through the lending window fell to N550 million in 2025 from N660 million in 2024, indicating that fewer banks required emergency liquidity support as market conditions improved.
The CBN attributed the changing pattern to stronger liquidity conditions across the interbank market
According to the apex bank, commercial banks increasingly preferred depositing excess funds with the central bank rather than accessing liquidity support, reflecting greater confidence in funding conditions and improved balance sheet positions
The report explained that reforms introduced by the CBN, alongside improved market confidence and better liquidity distribution across financial institutions, contributed significantly to easing funding pressures during the year.
The improvement became particularly evident during the second half of 2025 when liquidity conditions stabilised further despite the prevailing tight monetary policy environment.
The development also influenced the conduct of the CBN’s broader liquidity management operations.
Although Open Market Operations, OMO, remained the central bank’s primary instrument for regulating liquidity within the financial system, the total volume of OMO bill issuances declined considerably.
The report showed that OMO issuances dropped by 18.58 per cent to N40.90 trillion in 2025 from N50.23 trillion recorded in 2024.
The decline reflected both improved system liquidity and changes in the central bank’s operational strategy.
With banks already holding significant liquidity, there was less need for aggressive liquidity sterilisation through large scale OMO issuances.
Market indicators equally pointed to improving funding conditions.
The Open Repos Rate declined to 22.50 per cent from 27.30 per cent recorded in 2024.
Similarly, the Nigerian Interbank Offered Rate, NIBOR, for both overnight and 30-day tenors moderated significantly, indicating that banks found it easier to obtain funds within the interbank market.
The lower rates reflected reduced funding pressures and a gradual moderation in inflationary expectations as monetary tightening began to yield results.
The liquidity improvements coincided with an important shift in Nigeria’s monetary policy direction.
After several months of aggressive interest rate increases aimed at containing inflation and stabilising the foreign exchange market, the Monetary Policy Committee, MPC, reduced the Monetary Policy Rate, MPR, by 50 basis points to 27 per cent in September 2025.
Although borrowing costs remained historically elevated, the rate cut signalled growing confidence that inflationary pressures were beginning to moderate.
The apex bank also adjusted its reserve requirements during the year.
The Cash Reserve Ratio, CRR, for commercial banks was reduced to 45 per cent while a separate 75 per cent CRR was introduced for non-Treasury Single Account public sector deposits.
According to the CBN, the measures were designed to preserve price stability while ensuring orderly liquidity conditions within the financial system.
The developments marked a significant contrast to the liquidity challenges experienced by banks in previous years.
Throughout much of 2023 and 2024, elevated reserve requirements, aggressive monetary tightening and persistent inflation had constrained liquidity within the banking sector.
Many financial institutions frequently relied on the Standing Lending Facility to meet short-term funding needs, while interbank rates remained elevated due to tight market conditions.
The improvement recorded in 2025 therefore represented a notable turnaround in the banking system’s liquidity profile.
Industry analysts said the stronger liquidity position demonstrates that the banking sector has become more resilient despite macroeconomic challenges.
Higher deposits, stronger capital buffers, improved foreign exchange market stability and moderating inflation collectively enhanced confidence among market participants.
Banks also benefited from sustained growth in customer deposits, stronger earnings and improved balance sheet quality, enabling them to maintain larger liquidity buffers.
Nevertheless, economists argue that excess liquidity alone does not necessarily translate into stronger economic growth.
One of the major concerns remains whether banks will channel the surplus funds into productive lending or continue to prioritise risk-free investments and placements with the central bank.
Nigeria’s private sector continues to face significant financing constraints.
Although banking sector liquidity has improved, lending rates remain elevated following the cumulative monetary tightening implemented by the CBN over the past two years.
For many manufacturers, agricultural businesses and small enterprises, access to affordable financing remains one of the biggest obstacles to expansion.
Analysts argued that unless the improved liquidity translates into increased credit creation, the broader economy may derive limited benefits from the banking sector’s stronger financial position.
Historically, commercial banks have tended to favour low risk investments whenever interest rates remain elevated.
Government securities, CBN deposit facilities and other risk-free instruments often provide attractive returns with significantly lower credit risk compared with lending to businesses operating in a challenging economic environment.
This preference becomes more pronounced during periods of economic uncertainty when default risks are elevated.
The sharp rise in Standing Deposit Facility placements therefore reflects not only stronger liquidity but also banks’ continuing preference for preserving capital while earning relatively secure returns.
The trend is understandable from a risk management perspective but raises important questions regarding financial intermediation.
Banks play a critical role in mobilising savings and allocating capital to productive sectors of the economy.
When substantial liquidity remains parked within the central bank instead of supporting lending activities, investment and job creation may not expand at the pace required to sustain economic growth.
Business groups have repeatedly urged financial institutions to increase lending to sectors capable of generating employment and boosting domestic production.
Manufacturers, agricultural producers and small businesses continue to cite high financing costs as major impediments to expansion despite improving macroeconomic indicators.
Some economists believed that the gradual easing of monetary policy could encourage greater credit expansion over time.
If inflation continues to moderate and interest rates decline further, commercial banks may find lending to businesses increasingly attractive relative to parking excess funds with the central bank.
Lower policy rates would also reduce borrowing costs for businesses and households, potentially stimulating investment and consumer spending.
However, others caution that structural risks within the Nigerian economy continue to influence lending decisions.
Exchange rate volatility, infrastructure deficits, weak consumer demand and concerns over loan recoveries remain significant considerations for banks when evaluating credit opportunities.
Consequently, improvements in liquidity alone may not immediately translate into rapid expansion of private sector lending.
The banking industry’s liquidity position will therefore remain closely watched by policymakers.
For the CBN, maintaining adequate liquidity while preventing excessive inflationary pressures requires a delicate balance.
Too much liquidity could fuel inflation and exchange rate instability, while excessive tightening could constrain economic growth and limit credit availability.
The moderation in OMO issuances and money market rates suggests that the central bank is gradually recalibrating its liquidity management strategy as macroeconomic conditions improve.
The challenge going forward will be ensuring that stronger banking liquidity supports broader economic activity rather than remaining concentrated within the financial system.
As Nigeria pursues sustained economic recovery, policymakers will be looking beyond liquidity statistics to assess whether banks are expanding credit to businesses, financing infrastructure, supporting manufacturing and facilitating investment across key sectors.
The 2025 figures undoubtedly paint the picture of a more stable and liquid banking system. Commercial banks are borrowing less from the central bank, depositing more surplus funds and earning higher returns from those placements. Money market conditions have improved; liquidity pressures have eased and the CBN has begun cautiously adjusting its monetary policy stance.
Yet the larger test lies ahead. A banking sector awash with liquidity is only truly beneficial if those resources are effectively deployed to support productive economic activities. If Nigeria’s improved banking liquidity ultimately translates into stronger private sector investment, job creation and sustainable economic growth will determine whether the gains recorded in 2025 represent merely stronger financial stability or the foundation for a broader economic transformation, deployed to support productive economic activities.
