Global rating agency Fitch, says the Central bank decision, raising the amount of money in which commercial banks park in its coffer at zero interest, is credit negative for the sector.
Fitch noted the move would restrict commercial banks’ ability to lend and dampen their productivity.
“The Central Bank of Nigeria’s (CBN’s) decision, designed to reduce excess banking sector liquidity in an attempt to curtail high inflation, clashes with its competing objective to stimulate lending,” Fitch said Wednesday.
Nigeria’s Central Bank in its first monetary policy meeting for the year, raised the Cash Reserve Ratio (CRR) of banks, in what it says would help in mopping out excess liquidity in the system so as not to further add pressure on inflation which increased by 11.98 percent in December.
The apex regulator hiked the CRR by 500 basis points to 27.5 percent from 22.5 percent, a ratio it has since maintained in March 2016, but left both its benchmark interest rate and liquidity ratio unchanged at 13.5 and 30 percent respectively.
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The move has raised dust across fronts from analysts who said it contradicts the regulator’s July 2019 policy forcing commercial banks to lend at least 65 percent of their deposits to boost economic growth.
The banking index on the Lagos bourse dipped 1.26 percent to close 376.16 at the end of trading Wednesday, as investors remain cautious of what happens next for the sector.
Fitch said the CRR increase is an example of the kind of unpredictable regulatory intervention, seen especially since 2019, that poses challenges for Nigerian banks, one of the reasons for the negative sector outlook
“The CRR in Nigeria was already among the highest in the world and the increase will further limit banks’ ability to fund local currencies loan growth with domestic currency deposits.
With Nigerian banks still grappling their feet to meet the deadline of the 65 percent LDR so as not to fall, a victim of the regulators’ hammer, the CBN in October last year, banned non-bank foreign investors from investing in its short term OMO bills.
This helped in pushing funds into the thirsty equity market and into treasury bills, making yields of the Federal government short instrument crash to as low as 5 percent.
However, yields in the treasury bills market yesterday headed north and closing at a stop rate of 6.5 percent, according to FMDQ data. Analysts say the increase in the yields was due to the hike in CRR which has cut of banking sector liquidity.
Fitch said with the CRR now set even higher, banks may increasingly look to tap wholesale funding, such as local currency debt, as an alternative to local currency deposits, to support lending while circumventing the high CRR.
In late last year, the global rating agency revised its outlook for the Nigerian sector to negative from stable, partly due to rising regulatory risks, which it says pose risks to banks’ credit profiles.
