Nigeria’s central bank has once again rolled out a new policy aimed at boosting transparency, improving the pricing of money, reducing opacity, and aligning the country with global market standards.
- +Explainer: What CBN’s new market rule means and why it matters
- +From proxies to a real market signal
At its core is the recently introduced Nigerian Overnight Financing Rate (NOFR), a reference rate.
At its core is the recently introduced Nigerian Overnight Financing Rate (NOFR), a reference rate. Like fuel prices in the real economy, benchmark rates act as the base upon which other financial prices are built, shaping how banks lend, how assets are valued, and how funding costs are determined.
Developed in collaboration with the Financial Markets Dealers Association (FMDA) and supported by the European Bank for Reconstruction and Development, NOFR is based on actual overnight secured lending transactions rather than estimates or proxies.
According to the FMDA, this “provides a transparent, transaction-based benchmark… improving pricing accuracy, strengthening risk management and monetary policy transmission”.
An overnight rate simply captures the cost of borrowing funds today and repaying the next business day. These transactions are central to how banks manage daily liquidity and serve as a real-time signal of funding conditions in the financial system.
As the CFG Advisory puts it, “NOFR will bring transparency to the markets and help restore interest rate spreads.”
From proxies to a real market signal
Before NOFR, Nigeria lacked a clean measure of the true cost of overnight money. Market participants often relied on proxies such as Treasury bills or federal government bond yields to price short-term funding and derivatives.
Those instruments, while useful, were never designed for that purpose. They embed factors like duration risk, liquidity conditions, and sometimes credit premia – creating a disconnect between observed market prices and actual overnight funding costs.
“With the NOFR, it is now very easy for banks and the CBN to see how much interbank liquidity is available and how risk is being priced by the money markets and banks in real time,” a senior banking executive said.
“It’ll allow it to target liquidity interventions and monetary policy rates better and make the entire system more transparent and market-driven. This matters a lot for rates, inflation, and liquidity management,” the executive added.
The CBN notes that while NOFR provides a reliable starting point, it does not determine total borrowing costs. Loan pricing will still depend on credit risk, tenor, and contractual terms.
Nigeria’s move mirrors a broader overhaul of benchmark rates worldwide following the global financial crisis, when trust in estimated benchmarks eroded.
The U.S. replaced LIBOR with the Secured Overnight Financing Rate in 2022, while the UK adopted SONIA and the euro area introduced €STR – each based on actual transactions rather than submissions.
NOFR places Nigeria within that same reform trajectory, where benchmarks are anchored in observable market activity.
For market participants, the impact is practical. Banks managing overnight liquidity now have a clearer view of funding costs.
Dealers’ pricing of naira swaps can move toward more consistent discounting frameworks. Fund managers valuing collateral gain a cleaner benchmark for mark-to-market assessments. Over time, corporates may also see loan pricing linked more directly to transparent reference rates.
Early data obtained from the FMDA suggest the framework is working. NOFR has hovered around 22 percent, with daily transaction volumes averaging about N4.4 trillion.
The rate has remained relatively stable despite some variation across trades, indicating that the methodology is filtering out outliers while capturing underlying market conditions.
NOFR also strengthens how monetary policy flows through the system, thereby quickening the CBN’s price discovery aim in anchoring inflation.
Unlike the Monetary Policy Rate (MPR), which is set by policymakers, the NOFR is market-driven, reflecting actual supply and demand for short-term funds.
That distinction matters. A credible, transaction-based benchmark helps ensure that policy signals are transmitted more efficiently into lending rates and broader financial conditions.
