CBN’S STANDING LENDING FACILITY AND THE MONETARY POLICY CORRIDOR: IMPLICATIONS FOR NIGERIAN BANKS AND THE ECONOMY

CONTRIBUTOR: IFEDIORA OBIORA CHISOM

Introduction

The Central Bank of Nigeria (CBN) uses the Corridor framework to give guidance to markets about where interest rates might move so as to limit extreme volatility in interbank rates and to ensure that banks have predictable access to emergency liquidity, while discouraging excessive risk taking. Additionally, serves as a medium through which the CBN ensures that the transmission of monetary policy adjustments to bank lending and deposit rates is reasonably efficient.

The primary objectives of the CBN’s monetary policy are to secure and preserve price stability, to sustain high levels of employment, and to ensure the financial system remains sound.^[1] Since the instruments at the CBN’s disposal cannot directly alter these macro-economic outcomes, it instead uses those tools to affect certain intermediate variables (such as the interest rate at which a particular bank could lend to other banks). In turn those intermediate variables influence, over time, the key targets of inflation control and financial stability. Thus, the monetary policy corridor becomes important tools utilized by the CBN to achieve its goals.

Thus, this article will address the role of the monetary policy corridor in shaping the Nigerian economy.

Definition of Terms

Monetary Policy

Monetary policy involves the measures through which the central bank manages the supply of money, in order to stabilize prices.^[2] It plays a counter-balancing role to address price stability concerns and stabilize the economy.^[3] To better understand the definition , an example is provided thus: suppose inflation in Nigeria is rising rapidly, and consumer prices are increasing month after month. To curb inflation the CBN might raise the Monetary Policy Rate (MPR). As borrowing through banks becomes more expensive, businesses and individuals borrow less and demand falls. This can ease price pressures. At the same time banks may be incentivized to hold more funds rather than lend them out, which reduces money circulating in the economy. With time, this contributes to lower inflation.

Monetary Policy Rate (MPR)

The MPR is the official rate at which the CBN lends money to commercial banks.^[4] It is often regarded as the base interest rate, which guides the rates commercial banks charge their customers for loans and the interests paid on deposits. As of the CBN Monetary Policy Committee meeting held on 22 July 2025, the CBN held the MPR at 27.50%.^[5]

Standing Lending Facility (SLF)

In Nigeria, the SLF is a facility provided by the CBN through which commercial banks may borrow short term funds from the central bank to meet liquidity or reserve shortfalls.^[6] It is commonplace for apex banks to use it to regulate liquidity in the banking system and to reduce volatility in interbank rates.

For instance, in the United States of America (USA), the Federal Reserve (FR) operates the Discount Window, a facility that gives eligible banks short‐term loans (often overnight) when they need liquidity.^[7] Those loans must be secured by acceptable collateral. Under normal conditions banks try to borrow from each other at the federal funds rate rather than use the window because the Discount Window rate is higher. If interbank rates spike or liquidity is stressed, banks can then turn to the Discount Window as a last resort. This helps stabilize short-term rates and supports the FR’s goals of price stability and full employment.^[8]

Thus, the SLF illustrate how central banks provide contingency funding mechanism for short-term liquidity stress and anchor behaviour in money markets. Importantly, the Monetary Policy Committee set the SLF rate at 31.75%.^[9]

Standing Deposit Facility (SDF)

The SDF is a financial instrument employed by central banks to regulate liquidity within the financial system.^[10] Unlike traditional deposit mechanisms, the SDF allows banks to deposit surplus funds with the central bank without the need for collateral. The purpose is to absorb excess liquidity from the banking system, thus helping prevent very low interbank rates or overly large buildup of reserves with banks. Its existence encourages banks with surplus liquidity to use the facility rather than letting funds remain idle in the bank.

In a bid to streamline its monetary policy operations, the CBN has introduced a single-tier remuneration structure for its SDF.^[11] This means all deposits under the SDF will now earn interest at the MPR minus 100 basis points. With the current MPR set at 27.50 percent, this translates to a fixed SDF rate of 26.50%.

The CBN as the Key Regulator of the Monetary Policy Corridor in Nigeria

The CBN is Nigeria’s primary monetary authority.^[12] Under the CBN Act 2007, the Bank has responsibility for formulating monetary and credit policy through its Monetary Policy Committee. It has statutory mandates that include maintaining monetary stability, safeguarding the external value of the naira, ensuring a sound financial system and acting as lender of last resort. Thus, in order to facilitate the attainment of price stability and to support the economic policy of the Federal Government, the CBN Act 2007 established a Committee of the Bank to be known as the Monetary Policy Committee.^[13] The Monetary Policy Committee (MPC) has the responsibility within the Bank to formulate monetary and credit policy.^[14]

Implications for Nigerian Banks and the Economy

1. The SLF establishes a ceiling rate at which banks may borrow from the CBN when liquidity is tight. As a result, the cost of funds rises; that is, the rate that a bank must pay to obtain liquidity increases.
2. The SDF provides a floor on the rates bankers receive for placing surplus funds at the CBN. This means banks with excess liquidity might prefer the SDF rather than keep funds idle.
3. With an asymmetric corridor, that is the upper bound being much farther above MPR than the lower bound is below, banks are encouraged to avoid excessively relying on borrowing from the CBN. Poor liquidity planning may force reliance on SLF and this is very costly.
4. The Monetary Policy Corridor aids in the control of inflation. The corridor limits volatility in short-term interest rates. By setting an upper bound through the lending facility and a lower bound through the deposit facility, the CBN can more effectively influence actual market rates.
5. The MPR together with the corridor boundaries influence yields on government securities. When rates are high, cost of borrowing by the government rises. This increases the debt service burden, potentially diverting fiscal resources away from public investment or social services.

Conclusion

The standing lending facility and monetary policy corridor framework are central tools by which the CBN attempts to harmonize liquidity, interest rate stability and macroeconomic objectives in Nigeria. By defining clear upper and lower bounds around the MPR, the CBN creates incentive structures for banks to manage their funds prudently while maintaining predictable access to emergency liquidity. These mechanisms encourage banks to avoid over-dependence on costly central bank credit and promote healthier interbank market behaviour. Finally, the corridor supports more effective transmission of policy adjustments into lending and deposit rates thereby helping to stabilize prices and maintain confidence in the financial system.

REFERENCE

1. Olekah, JKA, ‘Standing Facilities and Liquidity Management in Nigeria: Progress so Far and Challenges under an IT Environment’, <https://share.google/FfheuQqk2vWFBQfNH> accessed 17^th September, 2025. ↑
2. CBN Monetary Policy Department, ‘Monetary Policy at a Glance’, <https://share.google/CCbhjC35XNVGZcwrw> accessed 17^th September, 2025. ↑
3. Ibid. ↑
4. Ego, ‘The Concept of Monetary Policy Rate in Nigeria’, <https://share.google/v4yQ3nf6zaNk4ENb2> accessed 17^th September, 2025. ↑
5. Adigun, O, ‘CBN Holds Interest Rates Flat at 27.5% for Seven Straight Time’, <https://share.google/D2uU0vanmFa2As10a> accessed 17^th September, 2025. ↑
6. ‘Intricacies of Liquidity Management in Nigeria’, < https://www.coronationmb.com/intricacies-of-liquidity-management-in-nigeria/> accessed 17^th September, 2025. ↑
7. The Federal Reserve, ‘The Discount Window’, <https://share.google/L0FIJIlEv29Eh3MvF> accessed 17^th September, 2025. ↑
8. Ibid. ↑
9. Moses-Ashike, H, ‘CBN Lifts Suspension on Bank Borrowing, Sets 31.75% Lending Rate’, < https://share.google/TzKSlkrJYCvahoLBK> accessed 17^th September, 2025. ↑
10. Ventura, ‘Standing Deposit Facility (SDF): Meaning and Implications for Investors’, <https://share.google/7DbXx0LJqZ67YC7lD> accessed 17^th September, 2025. ↑
11. Moses-Ashike, ‘CBN Introduces Single-Tier Standing Deposit Facility Rate at 26.50%’, <https://share.google/SRqSMzBH5jokGJJp6> https://share.google/SRqSMzBH5jokGJJp6 ↑
12. Ibeabuchi, SN, ‘Overview of Monetary Policy in Nigeria’, <https://share.google/r9BIOAvhyD3bvWcpA> accessed 17^th September, 2025. ↑
13. S 12(1). ↑
14. CBN Act 2007, s 12(3). ↑
15. Olekah, JKA, ‘Standing Facilities and Liquidity Management in Nigeria: Progress so Far and Challenges under an IT Environment’, <https://share.google/FfheuQqk2vWFBQfNH> accessed 17^th September, 2025. ↑