How CRR increase pull down banking industry liquidity

The Nigerian banking industry liquidity ratio at end of June 2014, stood at 42.66 percent compared with 67.8 percent at end-June 2013, and 50.6 and at end-December 2013.

The decline is attributed to increase in Cash Reserve Requirement (CRR) on both public and private sector deposits in the review period, according to 2014 half-year report released last week by the Central Bank of Nigeria (CBN). The CRR is the required cash banks are expected to keep with the CBN.

In 2013, the Monetary Policy Committee (MPC) chaired by Sanusi Lamido Sanusi, the former governor of the CBN, raised the public sector CRR to 50 percent from 12 percent.

Sanusi then explained that the reason for the MPC’s action was tailored towards reducing the level of liquidity in the economy, as he was concerned that about N1.3 trillion public sector fund was placed in some banks with zero percent interest rate while N2 trillion was loaned to government and its agencies at 14 percent interest rate.

He described the development as unacceptable, adding that the new CRR hike would reduce the quantum of public sector fund available in deposit money banks vaults for lending to government and its agencies.

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On February 2014, the CBN again raised the CRR on public sector deposit to 75 percent from 50 percent.

Samir Gadio, head of Africa Strategy at Standard Chartered Bank, had responded that “there has been limited volatility in NIBOR rates following the increase in the CRR on public sector funds to 75 percent, from 50 percent. Obviously, it took some time for NIBOR rates to surge following the introduction of the new ratio at the July 2013 MPC, with a lag of several weeks before the full effect could be felt in the interbank market as the most exposed banks faced liquidity shortages.”

However, the CBN and CEOs of banks last week at the first Bankers’ Committee meeting of the year discussed banks in terms of capital, capital adequacy ratio, in terms of liquidity, profitability and asset quality and came to a conclusion that all the ratios remain satisfactory, as all the banks were on average above regulatory minimum.

This is based on the fact that the routine test conducted on deposit money banks shows that they are healthy.

“It is encouraging to know that in spite of the headwinds, globally and domestic that the banking industry remain sound and resilient,” the committee said.

Addressing journalists after the meeting, the committee, which include Tokunbo Martins, director, banking supervision, CBN, Segun Agbaje, managing director/CEO of Guarantee Trust Bank, Ladi Balogun, managing director/CEO, FCMB, Omar Hafeez, managing director, Citibank Nigeria Limited, and Ibrahim Muazu, director, corporate communication, CBN, said “in conclusion that what we decided is that banks are sound, safe and resilient.”

The CBN’s report shows that at end-June 2014, the industry non-performing loans (NPL) ratio stood at 3.50 percent, compared with 3.23 percent and 3.65 percent at end-December 2013 and end-June 2013, respectively. The reduction in the NPL ratio relative to the corresponding period of 2013 was attributed to the improved risk management practices of banks.

The industry liquidity ratio stood at 42.66 percent at end-June 2014, compared with 50.6 percent and 67.8 percent at end-December 2013 and end-June 2013, respectively. The decline was attributed to increase in CRR on both public and private sector deposits in the review period.


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