Nigerian commercial banks are increasingly parking vast sums of money with the Central Bank of Nigeria (CBN), signaling a significant shift in their liquidity management and risk appetite. Data from the apex bank reveals an extraordinary surge in the use of the Standing Deposit Facility (SDF), where banks deposit excess funds overnight. This trend is a direct reflection of the prevailing monetary policy environment and the broader economic landscape.
The volume of overnight deposits placed by commercial banks with the CBN through the SDF has seen a phenomenal increase over the past year. As of May 6, 2025, these deposits reached a staggering N38.76 trillion. This represents a dramatic 1,549.36 percent surge, or more than 16 times the volume recorded just a year prior, when deposits stood at N2.35 trillion on May 7, 2024.
Factors Driving the Deposit Surge
Several interconnected factors are contributing to this unprecedented influx of funds into the CBN's SDF. A primary driver is the elevated Cash Reserve Ratio (CRR) mandated by the central bank. The CRR is the percentage of customer deposits that banks must hold in reserve with the CBN, effectively sterilizing liquidity. In a significant policy move in September 2024, the CBN hiked the CRR for commercial banks substantially by 500 basis points, moving it from 45 percent to a high of 50 percent. Merchant banks also saw their CRR increased from 14 percent to 16 percent.
Beyond the higher reserve requirement, the financial system appears to be experiencing abundant liquidity. This surplus cash, combined with a subdued demand for credit from businesses and individuals and a cautious, risk-averse lending posture adopted by banks, is naturally finding its way back to the central bank's facility. The CBN's overarching tight monetary policy stance, aimed at taming persistent inflation, further incentivizes banks to park funds rather than engaging in riskier lending activities.
The sheer scale of daily deposits underscores the liquidity situation. CBN data showed that on a single day, April 24, 2024, banks placed as much as N1.8 trillion with the CBN. While there were days with significantly lower deposits (the year-to-date low was N33.62 billion on March 24, 2025), the overall trend reflects both ample liquidity and a noticeable reduction in banks' willingness to take on credit risk.
Impact on Credit and Economic Growth
Analysts point to the CRR hike as a major catalyst for the increased deposits. Tilewa Adebajo, chief executive officer of CFG Advisory, commented that the surge is a "direct result of the 50 percent CRR," emphasizing that "Inflation management is the priority" for the central bank.
However, this approach has immediate consequences for the real economy. Adebajo noted that a key effect of this tight policy stance is a "lack of credit and liquidity constraints," which he believes will ultimately "dampen economic growth." He argued for greater emphasis on the fiscal side, advocating for structural reforms and monetary policy support to bring inflation down to levels seen in 2013–2014, when inflation was around 11 percent, interest rates 13 percent, and economic growth was robust at eight to ten percent.
Ayokunle Olubunmi, head of financial institution ratings at Agusto & Co., echoed these sentiments. He stated that while the trend indicates "improving liquidity of the banks," it also "highlights a cautious approach to lending amid economic headwinds." Olubunmi explained, "given the challenges in the economy, the banks are a bit careful about creating loans."
Contrasting Trends: Borrowing vs. Lending
Interestingly, while deposits with the CBN have soared, borrowing by deposit money banks from the CBN under the Standing Lending Facility (SLF) has also increased. SLF usage rose by 22.6 percent, reaching N54.29 trillion as of May 7, 2025, up from N44.29 trillion on the same date in 2024. This indicates that some banks still require short-term liquidity. However, the significant magnitude of SDF deposits dwarfs the SLF borrowing, reinforcing the picture of an overall system flush with liquidity that banks are hesitant to deploy into lending.
Despite the cautious lending environment, credit to the private sector has seen a modest year-on-year increase, rising by 6.8 percent from N71.43 trillion in March 2024 to N76.26 trillion in March 2025. Nevertheless, the month-on-month growth was nearly flat at just 0.01 percent between February and March 2025, suggesting limited recent expansion in private sector lending.
In stark contrast, commercial banks' credit to the government has expanded considerably. This increased by 28.9 percent, from N20.05 trillion in March 2024 to N25.85 trillion in March 2025. However, lending to the government saw a month-on-month decline of 4.6 percent from N27.11 trillion in February.
Monetary Tightening and Inflation
The current banking behaviour is deeply rooted in the CBN's sustained monetary tightening cycle. Over the past five years, the Monetary Policy Rate (MPR) has climbed from 11.50 percent in 2021 to a high of 27.50 percent as of March 2025. The most aggressive phase of this tightening occurred within the last year alone, with the MPR increasing by an unprecedented 875 basis points as the CBN intensified its fight against inflation.
These aggressive measures have yielded mixed results on the inflation front. Inflation, which stood at 24.48 percent in January 2025, saw a slight dip to 23.18 percent in February before ticking back up to 24.23 percent in March. The persistent upward pressure on prices suggests that underlying inflationary drivers remain stubborn, challenging the effectiveness of monetary policy alone.
Bank Profitability Amidst Challenges
Despite the challenging operating environment characterized by high CRR, limited lending opportunities, and economic headwinds, Nigerian commercial banks have continued to post strong earnings. Data shows that the pre-tax profit of five Tier-1 banks surged by 69.5 percent in 2024, reaching N4.56 trillion compared to N2.69 trillion in 2023. Similarly, net profit after tax increased by 66.2 percent, from N2.27 trillion to N3.78 trillion over the same period. This profitability highlights the banks' ability to navigate the complex regulatory and economic landscape, potentially benefiting from non-interest income sources and adjustments in their business models.