Nigeria's interbank lending rate dropped 6.5 percentage points on Friday to 5 percent on average as the money market was awash with cash from budgetary disbursal and coupon payment on matured bonds, traders told Reuters.
The cost of borrowing among commercial lenders closed at 11.5 percent last week due to drop in liquidity in the market necessitated by bond and treasury bills sales.
Traders said around 400 billion naira was injected into the banking system on Wednesday from December budget allocations to states and local governments, while 49 billion naira coupon on matured bonds was released by the central bank on Friday, boosting liquidity and forcing down interbank rate.
On Thursday, the central bank withdrew around 217 billion naira through the sales of short-dated open market operations (OMO) bills in a bid to reduce the level of excess liquidity in the banking system, but market liquidity remains high.
Balance in commercial lenders' accounts with the central bank stood at 254.46 billion naira surplus on Friday, against 202.58 billion naira last week.
"We strongly believe that the central bank will conduct more OMO next week to take out the excess cash from the system," one trader said, adding that expected dollar sales at a special forex auction could also help reduce the liquidity level and seen rate rising again.
Nigerian naira was unchanged at 498 to the dollar on the parallel market and 305.25 a dollar on the official interbank window on Friday as the market await the result of a special forex auction targeted at selected sector of the economy.
The central bank had on Wednesday asked commercial lenders to submit backlog dollar demand from fuel importers, airlines, raw-materials producers, and makers of agricultural chemicals and machinery for manufacturers.
The stock market main index rose 0.15 percent to 26,328 points, higher level since January 16, driven by gains in energy company Oando, which was up 4.05 percent and local French Total tick up 4.9 percent.