Nigeria's interbank rate dropped to 1.25 percent for overnight lending on Friday, from 3.5 percent last week, supported by increased liquidity from retired treasury bills and an expected injection of cash from December budget allocations.
Traders said the central bank injected around 331 billion naira ($1.66 billion) in matured open market operation (OMO) treasury bills into the banking system on Thursday, while additional naira from the budget and refunds from deposits for foreign exchange purchases are expected to hit the system by close of business on Friday.
Nigeria, Africa's biggest economy, distributes revenues from oil exports and taxes among its three tiers of government -federal, state and local- on a monthly basis, with the portion for state and local government passing through the banking system and providing liquidity.
Commercial lenders' credit balance with the central bank opened at 461 billion naira on Friday and is expected to rise to about one trillion naira next week, when more cash is injected into the system by the central bank, traders said.
"We expect to see the cost of borrowing in the market drop further by Monday because of the anticipated inflow of additional liquidity from the budget and refunds from the surplus from cash deposited for forex purchases," one dealer said.
The secured Open Buy Back (OBB) fell to 1 percent on Friday from around 3 percent it closed at last week.