Nigeria’s banking system entered the second quarter of 2026 with ample liquidity, but tighter monetary operations by the Central Bank of Nigeria (CBN) are changing the amount of cash available to lenders and shaping how banks deploy their funds across the economy.
The CBN, in its monthly economic report for April 2026, said the banking sector remained resilient, with most financial soundness indicators within prudential limits. The industry liquidity ratio rose to 74.16 percent in April, from 67.32 percent in March, and remained significantly above the 30 percent regulatory threshold.
However, average net liquidity in the banking system fell sharply by 30.07 percent to N4.72 trillion in April, from N6.75 trillion in March.
The decline was driven largely by Open Market Operations (OMO) auctions, Cash Reserve Requirement (CRR) maintenance and foreign exchange-related outflows, according to the CBN.
The contrasting figures point to an important distinction in Nigeria’s banking system: banks can remain highly liquid and capable of meeting short-term obligations even as the amount of excess cash circulating within the banking system declines.
For banks, this means tighter liquidity conditions could influence how they price loans, manage deposits and decide where to deploy available capital. For borrowers, particularly businesses, the key question is whether changes in liquidity will translate into greater access to cheaper credit.
And for the wider economy, the way banks respond to these conditions could determine how effectively financial resources are channelled into productive activities.
Why is banking liquidity falling?
Banking-system liquidity refers broadly to the amount of readily available funds within the financial system that banks can use to meet obligations, settle transactions or extend credit.
In April, the CBN reduced excess liquidity through a combination of OMO operations and CRR maintenance, while FX-related outflows also drained funds from the banking system.
The CBN offered N3 trillion worth of bills through its OMO auctions during the month. Banks and other investors subscribed N10.60 trillion, while N9.51 trillion was allotted at an average stop rate of 20.88 percent.
The scale of subscriptions shows that there was strong demand for CBN bills, allowing the Central Bank to absorb liquidity from the financial system.
The decline in liquidity was also reflected in banks’ use of the CBN’s standing facilities.
Placements in the Standing Deposit Facility (SDF), where banks deposit excess funds with the CBN, declined to N91.55 trillion in April from N130.69 trillion in March.
At the same time, requests for funds through the Standing Lending Facility (SLF) increased to N0.05 trillion, from N0.02 trillion in the preceding month, although the amount remained relatively small.
The lower use of the SDF indicates that banks had less excess cash available to park with the CBN, while the limited demand for the SLF suggests that the banking system remained sufficiently liquid to meet immediate funding needs.
This explains why the CBN could describe the banking sector as resilient despite the significant monthly decline in average system liquidity.
What does this mean for banks?
For banks, the changing liquidity environment means that simply holding excess cash or investing heavily in low-risk instruments may become less attractive.
The CBN said the average prime lending rate declined by 0.42 percentage point to 18.87 percent in April, from 19.29 percent in March. At the same time, the weighted average savings and term deposit rate increased to 8.74 percent from 8.36 percent.
The movement suggests some easing in the cost of prime lending while depositors received better returns on their funds.
The spread between the average deposit rate and maximum lending rate consequently narrowed to 26.44 percentage points from 26.82 percentage points.
The changing rate environment is also affecting the attractiveness of traditional investment channels for banks.
Dele Alabi, president and chairman of council, Chartered Institute of Bankers of Nigeria (CIBN), said banks could no longer depend largely on government securities and top-tier corporate borrowers to deploy their capital.
Speaking at a world press briefing in Lagos ahead of the CIBN 19th Annual Banking and Finance Conference, Alabi said the banking landscape had changed significantly, particularly as interest rates and yields on government securities decline.
“Capitalisation provides a buffer for shocks. It sort of insulates banks’ balance sheet. But it does not stop there,” Alabi said, stressing that banks must now think more strategically about how to deploy the capital raised.
According to him, banks previously focused heavily on government securities and top-tier companies, but the changing interest rate environment was making that strategy less attractive.
“Why? Because the interest rate regime is going down. Yields are coming down on the government securities. Also, for the top-tier sector players, the margins are thin. They want to borrow at single digits,” he said.
Alabi described capital as the most expensive source of funds and said banks therefore needed to deploy it in ways that would generate sustainable returns while supporting economic activity.
He identified micro, small and medium-sized enterprises as a major area of opportunity, arguing that smart banks would need to move further down the lending ladder to serve businesses that have historically faced limited access to credit.
“Therefore, smart bankers, smart bank CEOs, have to think of a more ingenious way of utilising this capital,” he said.
What does tighter liquidity mean for borrowers?
Tighter banking-system liquidity does not automatically mean that all borrowers will immediately face higher lending rates.
The April data actually showed that the average prime lending rate declined. However, liquidity is one of the factors that influence banks’ funding conditions and their willingness to extend credit.
When the CBN removes excess liquidity through OMO operations and CRR requirements, banks have less surplus cash available for deployment. This can make the competition for lendable funds more important, particularly where banks perceive borrowers as risky.
The effect is therefore likely to differ across categories of borrowers.
Large, established companies with strong balance sheets may continue to have access to bank credit at relatively competitive rates, while smaller businesses with weaker financial records, limited collateral or less formal operating structures may continue to face higher barriers.
This is where Alabi’s call for banks to move further down the economic value chain becomes significant.
As returns on government securities decline and large corporates demand cheaper loans, banks will have to find ways of lending profitably to businesses outside the traditional pool of prime borrowers.
That could increase the importance of MSMEs in the next phase of bank credit expansion.
Why does this matter for the economy?
Banks play a central role in transmitting monetary policy into the real economy.
When the CBN changes liquidity conditions, the impact eventually moves through money-market rates, bank funding costs, lending decisions and credit availability.
In April, the open repurchase rate rose marginally to 22.06 percent from 21.95 percent in March. The CBN said money-market rates remained broadly anchored within its policy corridor.
At the same time, government continued to attract substantial demand for its debt instruments.
Treasury bills worth N1.45 trillion were offered, N5.32 trillion subscribed and N1.63 trillion allotted across the 91-, 182- and 364-day tenors. Despite lower issuance compared with March, the instruments were oversubscribed.
The government also reopened five-, seven- and 10-year FGN bonds. Investors subscribed N0.95 trillion against N0.70 trillion offered, with N0.28 trillion allotted.
The continued demand for government securities means banks and other investors still have attractive avenues for deploying funds. But as yields decline, banks may increasingly need to assess whether lending to productive sectors can provide better long-term returns.
That decision matters for economic growth.
If banks concentrate too heavily on government securities and the safest corporate borrowers, large amounts of capital may remain outside sectors that require financing to expand production, hire workers and invest.
If banks can instead develop effective ways of managing the risks associated with MSMEs and other underserved businesses, tighter liquidity need not translate into weaker credit growth.
It could encourage more disciplined allocation of capital.
The bad-loan challenge
There is, however, another reason banks may be cautious about expanding lending.
The CBN reported that the banking sector’s non-performing loan ratio stood at 10.22 percent in April, significantly above the 5 percent prudential threshold.
The CBN attributed the elevated ratio to the initial impact of corrective policy measures, including the termination of COVID-19-related forbearance.
This means banks are entering a changing liquidity and interest-rate environment while also dealing with the need to strengthen asset quality.
The challenge is therefore not simply to put more money into the economy. Banks must identify borrowers capable of repaying loans and develop lending models that allow them to serve smaller businesses without generating excessive bad debts.
That balance will be crucial as banks adjust to lower yields and changing monetary conditions.
The bigger picture
The April data shows that Nigeria’s banking system is not facing a shortage of liquidity in the conventional sense. Its 74.16 percent liquidity ratio remains well above the regulatory minimum, while the capital adequacy ratio stood at 13.07 percent against a 10 percent minimum.
Rather, the system is experiencing a shift in the availability and cost of deployable funds as the CBN continues to manage liquidity through OMO, CRR and other monetary operations.
For banks, the implication is that capital must increasingly be deployed strategically rather than simply parked in relatively safe assets.
For borrowers, particularly MSMEs, the opportunity will depend on whether banks can develop profitable ways of managing the risks associated with lending to underserved businesses.
And for the economy, the ultimate test is whether Nigeria’s substantial banking-sector liquidity and capital can be converted into productive credit that supports businesses, investment and economic growth.
The challenge facing banks is therefore no longer just having enough capital. It is finding the right borrowers, pricing risk correctly and deploying that capital where it can generate sustainable returns while supporting the wider economy.
Hope Moses-Ashike is an Associate Editor, Banking and Finance, with more than a decade of experience reporting on Nigeria’s financial system and broader economy.
This was originally published on Nairametrics
