By Ayo Kehinde
Nigeria’s banking sector witnessed a significant surge in excess liquidity this week as commercial banks deposited nearly ₦7 trillion with the Central Bank of Nigeria through its Standing Deposit Facility (SDF).
The development highlights the growing volume of idle cash in the financial system and the cautious approach banks are currently adopting toward lending.
Recent data from the apex bank shows that Deposit Money Banks collectively placed about ₦6.96 trillion with the central bank on March 11. By the following day, the amount slightly declined to ₦6.69 trillion, but it still reflected one of the largest volumes of excess liquidity parked with the central bank in recent times.
The Standing Deposit Facility is a window that allows banks to place their surplus funds with the central bank overnight in exchange for interest. Rather than leaving excess funds idle or taking on additional lending risks, banks often prefer this option because it provides a safe and predictable return. The large deposits, therefore, suggest that many banks currently have more cash than they are willing or able to lend out.
Financial analysts say the development points to a cautious lending environment. Despite the availability of funds within the banking system, banks appear reluctant to expand credit significantly, largely due to prevailing economic uncertainties and concerns about loan repayment risks. As a result, surplus funds are being redirected to the central bank instead of flowing into the broader economy.
The rise in excess liquidity has also impacted the interbank market. With large volumes of funds circulating among banks, the cost of short-term borrowing between financial institutions has eased slightly. When liquidity is abundant, banks have less need to borrow from one another, which tends to push overnight lending rates downward.
Several factors may be responsible for the liquidity build-up in the banking system. These include inflows from government spending, the maturity of previously issued financial instruments, and cautious lending strategies by banks seeking to preserve asset quality. Together, these elements have contributed to a situation where the banking system holds substantial funds that are not immediately being channelled into loans for businesses or households.
While the central bank’s liquidity management tools are designed to maintain stability within the financial system, economists note that persistently high deposits at the Standing Deposit Facility may also indicate that credit growth to the real sector remains limited. If banks continue to prioritise safety over lending, the availability of financing for businesses and consumers could remain constrained despite the large amount of liquidity in the system.
For now, the near ₦7 trillion placed with the Central Bank of Nigeria underscores a paradox in the country’s financial sector, a banking system flush with cash, yet cautious about releasing it into the wider economy.
