Deposit Money Banks and merchant banks in Nigeria are increasingly opting for risk-free placements with the Central Bank of Nigeria (CBN) amid rising macroeconomic instability and credit risk in the real economy.
According to the latest financial data published by the apex bank, banks’ deposits through the Standing Deposit Facility (SDF) rose to ₦17.83 trillion in April 2025, representing a month-on-month increase of 243 percent from ₦5.2 trillion recorded in March.
The total value of funds placed by banks with the CBN from January to April 2025 stood at ₦37.05 trillion, up 1,549 percent year-on-year from ₦2.25 trillion during the same period in 2024.
The shift in liquidity preference has been attributed to multiple challenges affecting Nigeria’s business environment, including insecurity, foreign exchange volatility, supply chain disruptions, declining consumer purchasing power and elevated inflation levels.
Market analysts said these conditions have eroded credit confidence and increased the risk of non-performing loans across various sectors of the economy.
Banks are responding by deploying surplus liquidity into the SDF window, where they earn an interest rate of 26.5 percent, based on the current Monetary Policy Rate (MPR) of 27.5 percent.
The CBN had earlier removed the dual-tier remuneration structure for SDF deposits, allowing all placements to earn the MPR minus 100 basis points.
In contrast, private sector lending has slowed despite the CBN’s existing Loan-to-Deposit Ratio (LDR) policy designed to incentivize credit expansion.
Financial system liquidity has remained robust but banks are showing increased preference for risk-free returns over lending to businesses facing operational headwinds.
Data also showed that between January and April 2025, total borrowings by banks from the CBN via the Standing Lending Facility (SLF) stood at ₦54.96 trillion, indicating continued use of both liquidity windows for risk management and interest income optimization.
According to Tajudeen Olayinka, an investment banker and stockbroker, the spike in SDF patronage underscores the level of uncertainty banks are contending with.
“Rather than lend into an environment of heightened insecurity and weak demand, banks would rather face LDR penalties than expose themselves to non-performing loans,” he said.
Ambrose Omordion, Chief Operating Officer at InvestData Consulting Limited, noted that banks are making strategic decisions to protect their balance sheets.
He said the high interest rate on CBN deposits, combined with reduced appetite for credit by private sector borrowers, has made SDF placements a more attractive option.
Vice President of Highcap Securities, David Adnori, added that many banks are actively managing risk thresholds, especially around loan defaults.
“Banks are intentionally avoiding credit expansion to customers in high-risk sectors to maintain non-performing loan ratios below the five percent regulatory benchmark,” he said.
In 2024, banks and merchant banks deposited ₦38.12 trillion through the SDF, a 210 percent increase from ₦12.29 trillion recorded in 2023.
The CBN said the removal of the interest cap on remunerable deposits, along with rising monetary policy rates, contributed to the uptrend.
With inflation persistently above 30 percent and Treasury bill yields trailing real returns, the SDF has emerged as a preferred short-term vehicle for liquidity deployment.
The current macroeconomic trajectory suggests banks will continue to prioritize capital preservation and yield optimization until credit conditions improve.
The CBN is expected to review monetary policy again in Q3 2025. Market participants will be watching closely for signs of inflation moderation and economic stability that may restore confidence in private sector credit expansion.
