Liquidity Floods Markets, Manufacturers Struggle For Credit
Surging Treasury Bill Demand Signals Structural Imbalance
NIGERIA’S financial markets are showing clear signs of a widening disconnect between liquidity availability and real-sector financing, as investor appetite for government securities surges while manufacturers and small businesses struggle to access credit. The imbalance, analysts warn, threatens sustainable economic growth and could entrench speculative behaviour across financial assets.
This concern was reinforced by the outcome of the Treasury Bill (T-bill) auction held on 4 February, which revealed extraordinary levels of excess liquidity in the system. Demand for the 364-day instrument alone soared to about ₦4.4 trillion against an offer size of ₦800 billion—an oversubscription of more than 400 per cent.
Aggressive Bidding, Falling Yields
Despite the massive demand, yields on the one-year T-bill declined sharply. The stop rate dropped to 16.99 per cent from 18.47 per cent at the previous auction, reflecting intense competition among investors and expectations that interest rates may continue to soften.
By contrast, shorter-tenor instruments—the 91-day and 182-day bills—attracted relatively modest subscriptions, with marginal increases in stop rates. Market participants interpreted this as a sign of cautious liquidity positioning at the short end and a strong preference for locking in longer-term, risk-free returns.
The auction results point to an economy awash with liquidity, but one that is failing to effectively channel funds into productive investment.
Financial Sector Crowds Out the Real Economy
Market operators say the rush into government securities highlights a broader trend of risk aversion among financial institutions. While the Federal Government benefits from relatively cheap domestic borrowing, the real sector continues to face tight credit conditions.
Manufacturing, agriculture and small businesses remain starved of affordable funding, limiting their ability to expand production, create jobs and drive inclusive growth. Excess liquidity, instead of stimulating economic activity, is being recycled within financial markets, increasing the risk of asset price inflation.
Data show that in 2024, publicly quoted banks earned a combined ₦5.93 trillion from investments in securities—about 40 per cent of their interest income—underscoring the growing reliance on risk-free assets.
Private Sector Credit Shrinks as Government Borrowing Rises
Credit to the private sector remains weak and volatile. As of December 2025, total private sector credit declined by three per cent year-on-year, falling from ₦78.02 trillion to ₦75.83 trillion. In contrast, credit to the government jumped by 26 per cent to ₦34.22 trillion from ₦27.14 trillion a year earlier.
A decade ago, credit to government was just over 20 per cent of private sector lending. Today, the ratio has narrowed significantly to roughly one-to-two, reflecting how government borrowing is increasingly crowding out private investment.
Manufacturing Slowdown Deepens Concerns
The impact of restricted credit is already visible in economic indicators. The Stanbic IBTC Bank Nigeria Purchasing Managers’ Index (PMI) shows that manufacturing activity slowed in January, with the index falling to 105.8 points from 112 points in December 2025.
The broader private sector slipped into contraction for the first time in a year, with the PMI declining to 49.7 from 53.5, signalling weakening business confidence and output.
Experts Warn of Long-Term Consequences
Founder of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, warned that Nigeria risks prolonged economic stagnation if capital continues to flow disproportionately into government securities.
He described the growing dependence on T-bills and bonds as a sign of market failure, stressing that manufacturers require long-term funding at single-digit interest rates to survive.
Yusuf noted that pension fund assets, now exceeding ₦25 trillion, are largely invested in low-risk government instruments, while banks have adopted a similar risk-averse posture.
SMEs Pay the Highest Price
According to Yusuf, the credit squeeze is most severe for small and medium-sized enterprises (SMEs), many of which are forced to borrow from microfinance institutions at rates of about five per cent per month—equivalent to nearly 80 per cent annually when compounded.
Such borrowing costs, he said, are unsustainable and contribute to business failures, job losses and rising non-performing loans.
He urged development finance institutions to play a stronger role in bridging the funding gap, while calling for reforms to de-risk real-sector lending.
