• Friday, March 29, 2024
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BusinessDay

Nigerian banks squeezed by 40% effective CRR

Nigerian banks

Nigerian banks are having to park so much money with the Central Bank that it may scuttle a lending surge that some economists predict would give the economy a much-needed boost.

Sources tell BusinessDay that the effective Cash Reserve Ratio (CRR) for banks in Africa’s largest economy is between 40-50 percent even though the official rate is 27.5 percent.

The CRR, which is the amount in percentage of total deposits that the banks must keep with the  CBN, has always been above the official rate but has jumped further following the CBN’s hike in CRR to 27.5 percent from 22.5 percent at its first meeting of 2020.

In sticking to its higher effective CRR, the CBN debited the banks of some N700 billion and another N400bn for Open Market Operations (OMO) Friday, leading to interbank rates more than tripling.
The higher CRR is in line with the CBN’s liquidity mopping efforts which have intensified this year amid rising inflation.

The problem with a higher CRR is that it contradicts the CBN’s stance to boost lending in an economy still reeling from a recession.

“It is not like the debit is a new thing as it is part of the normal liquidity management, but when they raise the rate at which they debit them, the immediate impact is that it will restrict or constrain system liquidity within the banking system,” Abiodun Keripe, an investment research analyst at Lagos-based financial advisory firm, Afrinvest Securities Limited, said.

“As a result of that you will see inter-bank overnight rate, open buy back rate jump up,” Keripe said.
Interbank rates surged from around 3-5 percent, to 15 percent Friday. Overnight rate closed at 16.42 percent on Friday as against 2.50 percent on Thursday. Also, the Open-Buy-Back (OBB) rate also increased to 15.50 percent on the same day from 2.00 percent on the previous day.

“That is the impact it will have,” Keripe said, referring to the jump in interbank rates.
Efforts to reach the CBN for response were not successful as its spokesman did not respond to his call and text message.

Akintunde Olusegun, a financial market analyst at Polaris Bank Limited, said “the CRR debit led to liquidity squeeze in the market and consequently an increase in interbank rate”.

“The debit and continued excessive debit of CRR in that magnitude will to some extent limit banks’ ability to invest in government securities in size and will further push banks towards risk asset creation,” Olusegun said.

According to analysts at Renaissance Capital, Nigerian banks are caught in a conundrum and the squeeze will continue. A weak economy and tough regulations are core to understanding the dilemma.

Nigerian banking stocks fell to a four-year low this week on the back of falling oil prices and the coronavirus outbreak.

“Nigerian banks cannot afford to stay static, as we do not see the regulatory situation changing soon,” said analysts at Rencap, who went on to proffer solutions to how banks can survive despite mounting challenges.

They suggest banks scale growth in extant operations outside Nigeria, evolve into a holding company model with sizeable subsidiaries in fast-growth sectors, and build low-cost business models to penetrate the bottom of the pyramid.

“The banks would need to tailor these suggestions in a manner that best suits their individual circumstances,” the analysts at Rencap said.

HOPE ASHIKE-MOSES & LOLADE AKINMURELE