LAGOS Feb 19 (Reuters) - Nigeria's overnight interbank lending rate dropped to an average of 1 percent on Friday from around 4.5 percent on Thursday as the market anticipated refunds of cash deposited by commercial lenders for foreign exchange purchases.

Traders said liquidity dropped sharply in the week and the cost of borrowing climbed after commercial lenders moved cash to their naira accounts with the central bank to enable them to take part in the weekly forex intervention on Thursday.

On Tuesday, banks deposited about 700 billion naira ($3.5 billion) to back their planned forex purchases, draining liquidity in the banking system and pushing the lending rate above 4 percent.

"The cost of funds dropped today (Friday) based on expectation that the central bank will refund a portion of cash deposited for forex intervention before the close of business," one dealer said.

The central bank usually intervenes once a week in the official interbank foreign exchange market to provide dollars for eligible importers, while it requires commercial lenders to fund its naira account 48 hours ahead of the intervention.

Traders said they were expecting around 450 billion-500 billion naira in refunds from the central bank, raising the level of cash credits in favour of commercial lenders and helping to hold down interbank lending.

The total commercial lenders' credit balance with the central bank stood at 376 billion naira at the start of trading on Friday, but is set to rise by Monday to reflect the refunds.

The secured Open Buy Back (OBB) traded at 0.5 percent on Friday, against 4 percent the previous day.

The interbank rate reflects the level of naira cash liquidity in the banking system. ($1 = 199 naira) (Reporting by Oludare Mayowa; Editing by Ruth Pitchford)

Source: http://af.reuters.com/article/nigeriaNews/idAFL8N15Y3HZ