Nigeria's Interbank lending rate fell on Friday to an average of 14.83 percent after it initially rose to a multi-year record high of 16 percent on Thursday due to tight liquidity in the system.
Traders said a portion of the September budgetary allocations hit the system on Friday, providing liquidity and helped cost of borrowing among banks to recede.
"About 337 billion naira ($2.15 billion) budget allocation for the month of September hit the system today, helping to provide liquidity in the market," one dealer said.
Tight liquidity due to initial delay in the release of the budget funds caused acute cash shortage in the system in the week and forced some lenders to discount their AMCON held bonds for cash at the central bank to help fund their operations.
Traders said the secured Open Buy Back (OBB) was unchanged at 14 percent, from 12 percent last week, 200 basis points above the central bank's 12 percent benchmark rate and 400 basis points above the Standing Deposit Facility (SDF) rate. But the overnight placement fell to 15 percent, from 17 percent on Thursday, while call money dropped to 15.50 percent, from 17.25 percent.
"Though the market opened on Friday with a cash balance of 14 billion naira, the inflows of additional 337 billion naira from budget allocations credited the system today helped to pushed down lending rates," on senior treasurer said.
Africa's top crude exporter distributes oil funds from centrally held accounts every month to its three tiers of government -- federal, states and local -- which provides a much needed cash inflow to the banking system.
The disbursal of budgetary allocations from September oil revenues to the three tiers of government was due in the second week of October but was held up by what traders say is a row between the central and state governments over the handling of the account.
The funds were released on Wednesday, while actual inflows hit the accounts of some banks on Friday, helping to ease pressure in the interbank market for short-term borrowing among lenders.
Traders said rates might inch up gradually next week because of the aggressive liquidity mop-up exercise by the central bank in its efforts to curb excess liquidity in the system and rein in demand for the U.S dollar.
Traders said the regulator had already issued treasury bills worth about 200 billion in the conduct of open market operation on Friday to pre-empt the negative impact of the budgetary inflows into the system.
Next week, the central bank has indicated plan to sell about 132 billion naira in 91-, 182- and 364-day treasury bills, while foreign exchange purchases could also drain the system of part of the funds and cause interest rates to climb.
Indicative rates for the Nigeria interbank offered rate (NIBOR) however closed higher to reflect market outlook, with the seven day funds closing at higher at 17 percent from 16.83 percent last week. Thirty-day funds rose to 17.41 percent against 17.29 percent, the 60-day increased to 17.75 percent against 17.66 percent, while the 90-day rose to 18.04 percent from 17.95 percent.