Nigeria’s banking sector is grappling with unprecedented levels of excess liquidity, with commercial banks depositing a staggering N146.13 trillion with the Central Bank of Nigeria (CBN) through its Standing Deposit Facility in the first nine months of 2025, according to data from the apex bank.
The figure represents a dramatic 568.7 percent increase compared to the N21.85 trillion recorded during the same period in 2024, painting a picture of a financial system awash with funds that banks are finding difficult to deploy profitably into the real economy.
QUARTERLY SURGE REFLECTS DEEPENING LIQUIDITY GLUT
A quarterly breakdown of the data reveals the accelerating nature of this trend. Banks’ deposits with the CBN jumped 158.4 percent quarter-on-quarter to N49.68 trillion in the second quarter of 2025, up from N19.22 trillion in the first quarter. By the third quarter, this figure had climbed further to N77.23 trillion, representing a 55.4 percent increase.
September 2025 marked a watershed moment, with banks parking a record N50.73 trillion with the central bank in a single month—the highest monthly figure recorded during the period under review.
POLICY SHIFT DRIVES SDF PATRONAGE
Financial analysts attribute the massive uptake of the Standing Deposit Facility to two primary factors: the systemic excess liquidity in the banking sector and the CBN’s strategic shift to a single-tier remuneration structure for the SDF implemented last year.
Under the current framework, the CBN pays banks an interest rate of 100 basis points below the Monetary Policy Rate for deposits placed in the facility. With the Monetary Policy Committee cutting the MPR by 50 basis points to 27 percent just last week, banks now earn 26 percent on their SDF deposits—a rate many consider attractive given current market conditions and risk considerations.
BORROWING DECLINES AS LIQUIDITY TIGHTENS INTERBANK MARKET
In a seemingly contradictory trend, banks’ borrowings through the CBN’s Standing Lending Facility declined by 12.4 percent year-on-year to N69.37 trillion in the nine months, down from N87.09 trillion in the corresponding period of 2024.
However, quarterly figures reveal significant volatility. Borrowings surged 61 percent quarter-on-quarter to N50.46 trillion in Q2 2025 from N9.38 trillion in Q1 2025, before rising again by 78.8 percent to N10.67 trillion in Q3 2025.
The borrowing pattern reached a notable low point in September 2025, when banks took just N322 million from the SLF—a dramatic drop that experts say reflects liquidity constraints in the interbank money market despite the overall excess liquidity in the system.
The CBN charges banks 500 basis points above the MPR for SLF borrowings, making it an expensive source of funding at the current rate of 32 percent.
CBN’S AGGRESSIVE LIQUIDITY MANAGEMENT
To manage the excess liquidity threatening to destabilize monetary policy effectiveness, the apex bank has intensified its liquidity mop-up operations. Investigations reveal that the CBN sold N15.23 trillion worth of Open Market Operation Treasury Bills in the first nine months of 2025, representing an 86.6 percent increase from the N8.16 trillion sold during the same period in 2024.
These OMO sales, conducted regularly throughout the period, represent the CBN’s primary tool for sterilizing excess liquidity and maintaining some semblance of control over money supply growth.
IMPLICATIONS FOR MONETARY POLICY
The massive buildup of deposits at the CBN raises critical questions about the effectiveness of monetary policy transmission in Africa’s largest economy. Despite the central bank’s efforts to encourage lending to the real sector, banks appear more comfortable earning risk-free returns from the apex bank than extending credit to businesses and households.
This dynamic could undermine efforts to stimulate economic growth through monetary policy, as the liquidity that should be financing productive activities remains trapped in the central bank’s vaults. It also suggests that banks are either risk-averse due to economic uncertainties or are finding limited creditworthy opportunities in the current business environment.
The situation presents a policy dilemma for the CBN: reducing SDF rates to discourage deposits could push excess liquidity into other channels, potentially fueling inflation or asset bubbles, while maintaining current rates keeps vast sums of money locked away from the real economy.
As Nigeria continues to navigate economic headwinds, the resolution of this liquidity paradox—excess funds coexisting with credit constraints—will be crucial for achieving sustainable economic growth in the months ahead.
WHAT YOU SHOULD KNOW
Nigerian banks parked a record N146.13 trillion with the Central Bank in the first nine months of 2025—a staggering 569% increase from the previous year—revealing a critical problem: the banking system is flooded with excess cash that isn’t reaching businesses and households.
Despite this liquidity glut, banks prefer earning safe returns from the CBN (currently 26%) rather than lending to the real economy, effectively starving businesses of credit. This creates a dangerous paradox where money is abundant in the banking system but unavailable for productive investment, threatening Nigeria’s economic growth.
The CBN’s aggressive efforts to mop up N15.23 trillion through treasury bill sales show the apex bank is struggling to control this excess liquidity and restore effective monetary policy transmission.
