Nigeria’s monetary data between January 2025 and January 2026 shows a notable expansion in demand deposits alongside a persistent increase in cash held outside the banking system—two trends that offer important insights into liquidity conditions, financial intermediation, and broader economic activity.
Data from the Central Bank’s money and credit statistics on Monday, indicate that demand deposits rose from about ₦32.19 trillion in January 2025 to ₦37.12 trillion by January 2026, representing an increase of roughly 15.3 percent within the 12-month period.
Demand deposits—funds held in current accounts and accessible on demand—are a key indicator of transaction activity in the economy. Their growth typically signals increased commercial activity, higher banking penetration, or stronger confidence in the financial system.
At the same time, the amount of currency outside banks climbed from about ₦4.74 trillion in January 2025 to approximately ₦5.21 trillion in January 2026, marking an increase of nearly 10 percent over the period.
Rising Deposits Reflect Stronger Banking Activity
The growth in demand deposits suggests that businesses and households are increasingly conducting transactions through the banking system. This trend can be linked to several factors, including the continued expansion of digital banking channels, regulatory reforms encouraging electronic payments, and a gradual shift toward formal financial transactions.
A higher volume of demand deposits strengthens banks’ liquidity positions and expands their capacity to extend credit to the private sector. Since commercial banks rely heavily on deposits to fund lending activities, the increase provides a stronger base for financial intermediation and economic expansion.
Moreover, rising deposits may reflect stronger economic turnover in sectors such as trade, services, and manufacturing, where current accounts are widely used for daily transactions.
Despite the growth in deposits, the simultaneous increase in currency outside banks highlights a lingering structural issue within the Nigerian financial system.
Cash outside banks represents money held physically by individuals and businesses rather than deposited in financial institutions. When this figure rises, it indicates that a significant portion of liquidity remains outside the formal banking system.
Several factors may explain this trend. Informal economic activity remains substantial in Nigeria, with many small businesses and traders preferring cash transactions. In addition, concerns over banking charges, access to financial services in rural areas, and lingering trust issues with financial institutions may encourage households to hold physical cash.
The rise in cash outside banks also suggests that the full impact of earlier cashless policies and financial inclusion initiatives has yet to be realized.
For monetary authorities, the coexistence of rising deposits and increasing cash outside banks presents a complex policy landscape.
On one hand, higher deposits improve the transmission of monetary policy because funds held within banks can be influenced more directly through interest rates and liquidity management tools.
On the other hand, large volumes of cash circulating outside the banking system weaken the effectiveness of monetary policy interventions. When money remains outside banks, the Central Bank has less direct control over liquidity conditions, making it more difficult to manage inflation and stabilize the currency.
An increase in both deposits and currency circulation suggests that overall liquidity in the economy remains elevated. While this can support economic activity and consumer spending, it also carries inflationary risks if not matched by growth in productivity and output.
Higher liquidity may fuel demand-driven inflation, particularly in sectors such as food, transportation, and housing where supply constraints persist.
However, if properly channeled through the banking system into productive investment and private-sector credit, the liquidity expansion could stimulate economic growth rather than inflationary pressure.
Financial Inclusion and Economic Formalisation
The data also highlight the continuing need to deepen financial inclusion. Reducing the volume of cash outside banks would help formalize economic transactions, improve tax collection, and enhance transparency within the financial system.
Policies that expand mobile banking, agency banking networks, and digital payment infrastructure could help draw more money into the formal banking sector.
Greater financial inclusion would also enable small businesses to access credit, savings products, and insurance services, strengthening economic resilience.
The simultaneous rise in demand deposits and currency outside banks underscores the dual nature of Nigeria’s economy—one that is increasingly digitized yet still heavily cash-dependent.
If banking sector reforms and digital payment initiatives continue to gain traction, a larger share of liquidity may gradually migrate into the formal financial system. Such a shift would strengthen monetary policy effectiveness, expand credit availability, and support broader economic development.
For policymakers, the challenge will be to maintain financial stability while encouraging a transition toward a more inclusive, bank-driven economic structure.
