By Juliet Ezeh
The Central Bank of Nigeria (CBN), in collaboration with the Financial Markets Dealers Association (FMDA), has officially introduced the Nigerian Overnight Financing Rate (NOFR), marking a major step toward modernising Nigeria’s financial system and improving transparency in the money market.
The announcement represents a significant milestone in Nigeria’s ongoing financial sector reforms, positioning the country alongside advanced economies that have already transitioned to more reliable and transparent benchmark interest rates.
The Nigerian Overnight Financing Rate (NOFR) is Nigeria’s official overnight risk-free interest rate benchmark. It reflects the cost at which banks lend money to each other overnight using secured transactions within the interbank market. Unlike traditional benchmark rates that depend on estimates or submissions, NOFR is strictly based on actual transaction data, making it more transparent, credible, and resistant to manipulation.
By adopting NOFR, Nigeria joins a global shift toward transaction-based benchmarks, replacing older systems that were often prone to inaccuracies and distortions. This move is expected to significantly improve how the country’s financial markets operate.
According to the CBN, the introduction of NOFR will enhance transparency in interest rate determination, improve price discovery across financial markets, strengthen the transmission of monetary policy, boost investor confidence, support financial innovation, and reduce the risk of manipulation within the system. These improvements are particularly important as Nigeria seeks to attract both domestic and international investment into its financial markets.
A transparent benchmark such as NOFR ensures that financial instruments are priced more accurately, creating a fairer and more efficient market environment for all participants.
With the launch of NOFR, Nigeria aligns itself with leading global financial systems that have adopted similar benchmarks. These include SOFR in the United States, SONIA in the United Kingdom, €STR in the Eurozone, and TONA in Japan. Within Africa, Nigeria’s new benchmark complements JIBAR, which is used in South Africa. This alignment enhances Nigeria’s credibility in the global financial system and increases its attractiveness to foreign investors.
NOFR is calculated using a volume-weighted trimmed mean methodology. This approach considers only eligible overnight secured transactions denominated in Nigerian naira, with a minimum threshold of ₦5 billion. To ensure accuracy, the lowest and highest 10 percent of transaction volumes are excluded, while the remaining data is averaged to produce the daily rate. This method helps eliminate extreme values that could distort the final outcome, resulting in a more reliable benchmark.
The rate is published daily at 10:00 a.m. Lagos time on the business day following the transactions. In situations where there is insufficient transaction data, the CBN applies the previous day’s rate while clearly disclosing this to maintain transparency.
For banks and financial institutions, NOFR introduces a more dependable reference rate for pricing and risk management. It will be used in interbank lending, pricing of money market instruments, valuation of financial assets, and broader risk management practices. This consistency allows institutions to manage liquidity more effectively while reducing uncertainty within the financial system.
Businesses and corporate entities may also begin to see NOFR referenced in structured loans, syndicated loans, and large financing arrangements. However, the benchmark does not directly determine borrowing costs. Instead, it serves as a base reference rate, while actual loan pricing continues to depend on factors such as credit risk, loan duration, bank margins, and prevailing market conditions. For corporates, the primary advantage lies in improved transparency and more predictable pricing structures.
Investors are expected to benefit significantly from the introduction of NOFR. The benchmark can be applied in pricing financial instruments, discounting cash flows, valuing assets, and managing financial risks. With a transparent and credible rate in place, investors are better positioned to make informed decisions, which could lead to increased capital inflows, particularly from international markets seeking stability and transparency.
For retail banking customers, NOFR will not directly determine savings or loan interest rates. Banks will continue to set these rates based on various factors, including funding costs, operational expenses, and credit risk. However, customers are likely to benefit indirectly through increased transparency, improved trust in the financial system, and more stable interest rate movements over time.
The CBN will serve as the official administrator of NOFR, ensuring proper governance, daily publication, transparency in methodology, and periodic reviews of the framework. The methodology is expected to be reviewed at least once annually to maintain its effectiveness and relevance. Any corrections to the rate will only occur in rare instances where there is a material error of at least five basis points, and such corrections will be clearly disclosed.
According to the Acting Director of Corporate Communications at the CBN, Hakama Sidi Ali, the introduction of NOFR reflects the bank’s commitment to strengthening Nigeria’s financial infrastructure and aligning with global best practices.
The launch of the Nigerian Overnight Financing Rate represents a transformative step in Nigeria’s financial evolution. By adopting a transparent, transaction-based benchmark, the country is not only improving its domestic financial system but also positioning itself as a credible participant in the global financial market.
As financial systems continue to evolve worldwide, benchmarks like NOFR will play a crucial role in ensuring stability, fairness, and efficiency. For Nigeria, this development signals a strong commitment to improving monetary policy effectiveness, enhancing market confidence, and building a more resilient financial system for the future.
Juliet Ezeh is the founder and chief reporter at Westbridge Reporters with over 7 years of experience in journalism. She covers crime, industry, policy, and social developments, delivering timely and accurate reporting.