… Banking System Liquidity Tightening Shrinks Private Sector Credit Growth
Banking system liquidity tightened at the start of 2026 following aggressive liquidity sterilisation by the Central Bank of Nigeria (CBN), which drained about N1.8tn from bank reserves in January.
Latest monetary data seen by NewsNGR showed that reserves held by deposit money banks declined from N32.04tn in December 2025 to N30.26tn in January 2026, representing a 5.5 per cent month-on-month drop.
The sharp fall reflects the impact of large-scale liquidity mop-up operations conducted by the CBN as part of efforts to moderate excess liquidity and sustain its inflation-fighting stance.
The sterilisation operations also contributed to a mild contraction in broad money supply during the period. Data indicate that Money Supply (M3) fell by 0.8 per cent month-on-month to N123.36tn in January, down from N124.41tn recorded in December 2025.
Similarly, Money Supply (M2) declined slightly to N123.35tn from N124.40tn in the previous month.
The contraction followed a substantial increase in liquidity absorption by the apex bank.
In January alone, the CBN mopped up about N13.41tn from the financial system, significantly higher than the N2.77tn absorbed during the same period in 2025.
Findings revealed that the aggressive sterilisation measures were aimed at tightening monetary conditions and preventing excess liquidity from fuelling inflationary pressures in the economy.
Further breakdown of the monetary aggregates showed that Nigeria’s Net Foreign Assets (NFA) declined by 6.0 per cent to N29.61tn in January from N31.51tn in December. The decline in foreign assets also contributed to the moderation in overall money supply during the period.
However, Net Domestic Assets (NDA) expanded slightly by 0.9 per cent to N93.76tn from N92.9tn, largely supported by domestic credit growth within the financial system.
Despite the expansion in domestic assets, credit indicators showed signs of a modest slowdown at the beginning of the year.
Credit to the private sector declined by 0.8 per cent to N75.24tn from N75.83tn in December, suggesting that bank lending to businesses and households eased slightly amid tighter liquidity conditions.
Similarly, credit to government fell marginally by 0.1 per cent to N34.19tn, compared with N34.22tn in December, indicating a slight moderation in public sector borrowing after a sharp increase recorded at the end of last year.
Cash indicators also reflected the tightening liquidity environment. Currency outside banks declined by 3.7 per cent to N5.21tn in January from N5.41tn in December, while currency in circulation remained broadly stable at about N5.73tn.
The liquidity squeeze reflects the CBN’s continued use of monetary policy tools to control inflation and stabilise the financial system.
However, the Monetary Policy Committee (MPC) signalled a potential shift toward gradual policy easing during its meeting on February 24, when it reduced the Monetary Policy Rate (MPR) from 27 per cent to 26.5 per cent.
Early market reactions suggest that fixed income yields and interbank lending rates have begun to adjust downward in response to the rate cut, reflecting expectations of improved liquidity conditions in the coming months.
The transmission of the policy adjustment could begin to support credit growth and lending activity from March onward as banks respond to lower funding costs and improving system liquidity.
The Governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso had warned that excess liquidity remains a major risk to macroeconomic stability, saying the economy is not yet out of danger despite recent gains from reforms.
Cardoso who spoke at the national economic council (NEC) meeting in Abuja held last month, pointed out that the large volumes of money still circulating within the financial system must be carefully managed to prevent renewed inflationary pressures.
“There is still a lot of liquidity within the system, and we’re going to manage this very carefully. We are not out of the woods yet,” the economist said.
The CBN governor said election-cycle spending had injected significant liquidity into the economy, adding that such inflows must be closely monitored to avoid undermining reforms that have helped stabilise prices and restored confidence.
“The election cycle, a typical election cycle, a lot of money has been pumped into the system. This has to be watched to ensure that it does not destabilise and challenge the very bold reforms which have brought about stability to the economy,” he added.
He also identified global trade tensions as an external risk factor that could worsen domestic pressures.
Cardoso cautioned that monetary policy alone cannot sustainably deliver low and stable inflation, especially in an economy where food supply shocks, high energy and logistics costs, infrastructure deficits, and informality weaken policy transmission.
“Monetary policy is a necessary but insufficient tool,” he said.
The central bank governor said lasting stability would require fiscal discipline, improved revenue mobilisation, efficient public spending, and stronger coordination between fiscal and monetary authorities.
He further said subnational governments play a critical role in managing liquidity and inflation, noting that states control about half of the federation revenue and significantly influence macroeconomic outcomes.
