Financial Institutions Avoid Real Sector Loans, Deposit N61.57trn at CBN in November

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Banks Continue to Deposit Excess Funds with CBN Amid Economic Uncertainty

Banks in Nigeria have shown a growing preference for depositing excess funds with the Central Bank of Nigeria (CBN) rather than lending to the real sector. This trend has been driven by high interest rates, concerns about credit risk, and ongoing economic uncertainty. In November 2025, banks deposited a staggering N61.57 trillion with the CBN, marking a 4.6% decline from the N64.55 trillion deposited in October 2025.

The Standing Deposit Facility (SDF) is the primary tool used by banks and merchant banks to park their surplus cash with the CBN. The CBN, in turn, lends some of these deposits back to banks through its Standing Lending Facility (SLF) window to meet overnight obligations. However, the data shows that banks are increasingly favoring the SDF over borrowing from the CBN, reflecting a shift in their financial strategies.

Record Deposits and Declining Borrowing

From January to November 2025, banks and merchant banks deposited a total of N272.31 trillion with the CBN, which represents a massive 792.1% year-on-year increase compared to the N30.52 trillion deposited during the same period in 2024. This surge highlights a significant shift in liquidity management within the banking system.

In contrast, borrowing from the CBN has declined sharply. Between January and November 2025, banks borrowed an estimated N69.54 trillion from the CBN, a drop of nearly 40% compared to the N115.71 trillion borrowed between January and November 2024. This decline suggests that the interbank market is becoming less pressured, reducing the need for banks to access short-term liquidity through the SLF.

Earlier in the year, SLF demand was relatively high, peaking at N24.8 trillion in February 2025 before easing to N16.49 trillion in March 2025. Analysts suggest that this mixed behavior indicates a strengthening of system liquidity, although some institutions still require overnight support to balance their books.

Reasons Behind the Shift

Experts attribute this trend to a combination of factors, including high benchmark rates, elevated credit risk concerns, and a general preference for the safety of the CBN’s facilities over lending to the real sector. Mr. David Adnori, Vice President of Highcap Securities Limited, noted that banks are opting for the known returns of the SDF rather than taking on the uncertainties of lending.

He explained that while banks are placing excess funds with the CBN, their borrowing from the apex bank has slowed as pressures in the interbank market ease. “This shift signals a recovery in liquidity conditions and a more comfortable cash stance heading into 2026,” he added.

Adnori also pointed out that the surge in SDF placements reflects a deeper tension between liquidity abundance and lending reluctance in the financial system. He emphasized that banks are acting rationally, responding to signals from an environment marked by high inflation, exchange rate volatility, and weak consumer confidence.

Monetary Policy Adjustments

The CBN recently adjusted the monetary policy rate (MPR) and the standing facilities corridor. Following a reduction of 50 basis points, the MPR was set at 27%, with the corridor around the MPR adjusted to +50 basis points/-450 basis points from the previous range of +250 basis points/-250 basis points.

Cordros Research highlighted that despite expectations of a 100 basis point reduction, the MPC retained the MPR at 27%, citing elevated inflation levels. However, the adjustment to the asymmetric corridor is expected to ease monetary conditions and encourage banks to expand credit to the private sector.

The interest rates for the SDF and SLF were also reduced to 27.5% and 22.5%, respectively, from previous levels of 29.5% and 24.5%. These changes are intended to improve liquidity and support economic activity.

Outlook for 2026

Looking ahead, Cordros Research anticipates that inflation will continue to ease in 2026, driven by sustained naira stability, improved harvest outcomes, and stable petroleum prices. However, given that inflation is likely to remain in double digits, the pace of interest rate cuts is expected to be measured.

The removal of the cap on remunerable SDF by the CBN has further encouraged banks to utilize the facility. The central bank has stated that strong patronage at the SDF confirms healthier liquidity in the banking system, with banks seeking better yields.

With the current inflation rate above the yield on Treasury bills, banks and merchant banks are turning to the SDF for risk-free investments. This trend is expected to influence fixed income markets, with analysts predicting a gradual decline in yields as liquidity conditions improve and inflation slows.

Overall, the continued preference for the SDF over traditional lending reflects a cautious approach by banks amid ongoing economic challenges. As the financial system navigates these uncertainties, the role of the CBN in managing liquidity and stabilizing the economy remains critical.