On the back of high benchmark rates, economic uncertainty and credit risk concerns, banks closed 2025 with N336.2 trillion total deposit with the Central Bank of Nigeria (CBN), about 777.2 per cent Year-on-Year (YoY) increase over N38.33 trillion deposited in 2024.

Banks and merchant banks deposit excess cash at CBN via the Standing Deposit Facility (SDF) window. The CBN lends the funds to any bank needing liquidity through its Standing Lending Facility (SLF) window.

Analysis of the CBN financial data for 2025 revealed that banks and merchant banks deposited more cash than they borrowed to underline excess liquidity in the financial sector.

The data revealed that banks and merchant banks borrowed an estimated N69.7 trillion in 2025, representing a decline of 47.2 per cent from N131.99 trillion borrowed in 2024.

Earlier in the year, SLF demand remained relatively high at N24.8 trillion in February 2025, slightly before easing to N16.49 trillion in March 2025.

Towards the end of 2025, banks and merchant banks’ deposits with CBN witnessed a significant increase, reaching an all-time high of N64.55 trillion in October 2025.

The mixed behavior between deposit and lending by CBN to banks and merchant banks showed that although system liquidity was strengthening in 2025, some institutions still required overnight support to rebalance their books and lend to the real sector.

Analysts attributed the growth in banks and merchant banks deposit to high credit risk concerns and a preference for the safety of the regulator window rather than lending into the real sector.

In a chat with THISDAY, Investment Banker & Stockbroker, Mr. Tajudeen Olayinka stated that, “With high benchmark rates for lending and borrowing, and concerns about credit risk and economic uncertainty, banks may prefer the relative safety of the SDF. It offers them a known return rather than extending credit into uncertain territory.”

While banks and merchant banks eagerly placed excess funds with the apex bank, borrowing from the CBN slowed as pressures in the interbank market relaxed.

The increase signalled a recovery in liquidity conditions and a more comfortable cash stance heading into 2026.

He explained that the sharp surge in Nigerian SDF placements with the CBN, therefore, is more than a fleeting statistic.

“It captures a deeper tension between liquidity abundance and lending reluctance in the financial system. Beneath the numbers lies a complex web of caution, policy tightening, and an economy grappling with uncertainty. Banks are not acting irrationally. They are responding to signals from an environment marked by high inflation, exchange rate volatility, and weak consumer confidence,” he added.

“It captures a deeper tension between liquidity abundance and lending reluctance in the financial system. Beneath the numbers lies a complex web of caution, policy tightening, and an economy grappling with uncertainty. Banks are not acting irrationally. They are responding to signals from an environment marked by high inflation, exchange rate volatility, and weak consumer confidence,” said Vice President, Highcap Securities Limited, Mr. David Adnori.

According to him, the CBN’s aggressive monetary tightening, with the MPR held at 27per cent, has made the SDF rate of about 25.75 per cent particularly attractive.

“Faced with this reality, banks prefer to earn nearly risk-free returns by placing funds with the CBN rather than extending credit to businesses struggling under heavy input costs and uncertain demand,” he explained.

Amid drop in MPR to 27 per cent in 2025, the CBN adjusted the standing facilities corridor around the MPR to +50basis points/-450basis points from the previous: +250basis -250 basis points.

Cordros Research in a report after the November 24-25 MPC meeting stated that, “Contrary to our expectations of a 100basis points reduction, the MPC retained the MPR at 27per cent, despite the sharper disinflationary outturn in recent months and the appreciation of the naira.

“According to the MPC, inflation remains elevated at double-digit levels, underscoring the need to keep interest rates high to strengthen the disinflationary trend. However, the Committee signalled an easing bias by adjusting the asymmetric corridor to +50/-450basis points (Previous: +250basis points/-250basis points) around the MPR.

“This indicates a reduction in interest rates for the SLF and the SDF to 27.5per cent (Previous: 29.5per cent) and 22.5per cent (Previous: 24.5per cent), respectively. The adjustment is expected to ease monetary conditions and strengthen banks’ private sector credit expansion.

“Going into 2026, we expect inflation to continue easing as key drivers unwind, including sustained naira stability, better harvest outcomes and relatively stable petroleum prices. Nonetheless, in line with the MPC’s price stability goal and given that inflation is likely to remain in double digits in 2026, we believe the pace of interest rate cuts will likely remain measured.”

The applicable rates for the SDF and SLF in 2023 increased by 50 basis points to 11.50 and 19.50 per cent, respectively, following the hike in the policy rate by 50 basis points to 18.75 per cent in June 2023.

The interest rate at which these banks borrow from CBN changed in 2024 amid the Monetary Policy Committee (MPC) hike in MPR or interest rate.

In 2024, the MPC members voted to increase interest rate from 18.75 per cent to 27.50 per cent amid its mandate to tackle inflation rate and unstable Naira at the foreign exchange market. However, the MPC members of the CBN towards the end of September 2025 voted to reduce MPR by 50 basis points to 27per cent, marking a significant shift to an expansionary monetary policy.

This move, which comes amid five consecutive months of sustained disinflation, aims to boost economic activity and address liquidity issues in the banking system.The decision was influenced by the fall in the inflation rate from 24.8per cent in January 2025 to 18.02per cent in September 2025.

The increase in SDF is coming on the backdrop of CBN removal of the cap on the remunerable policy, among others.

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.

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 is above yield on Treasury bills (T-Bills) as banks and merchant banks are looking for risk-free investments, which SDF has provided since MPR hike.

On the impact on fixed income, Cordros Research added that, “With the MPC maintaining the MPR, the fixed income market enters the rest of the year with a stable policy anchor that should support a continued, albeit marginal, yield decline. Precisely, we expect a measured decline across the curve, driven largely by improved liquidity conditions and a slower inflation trajectory. (This Day)