For every N100 deposit held by Nigerian commercial banks, about N60 idles away with the central bank as regulatory reserves earning zero interest. This means lower profitability for lenders and then stifling access to finance for millions of small businesses in Africa’s largest economy.
BusinessDay investigation also revealed that for some banks, the portion of their funds held by the apex bank is far in excess of 60%, a clear indication of regulatory discrimination.
While the official Cash Reserve Ratio (CRR) for banks is 27.5 percent, bankers say the CBN currently holds as much as N10.3 trillion in CRR, which adds up to a CRR of between 58 and 60 percent of total naira deposits of N17 trillion.
CBN’s spokesperson, Isaac Okarafor, did not return calls seeking comment on why the CBN is holding so much money in CRR.
At 60 percent, Nigeria’s CRR is not only more than double the official 27.5 percent rate but it is the highest across developed, emerging and frontier markets surveyed by BusinessDay. The N10.3 trillion the CBN holds is also about the size of the country’s federal budget.
Implication for banks and economy
“This means Nigerian banks are having to work significantly harder than banks elsewhere in the world to deliver profitability, and get held to even higher expected return hurdles,” said Adesoji Solanke, an analyst at Renaissance Capital.
“Higher CRR hurts the banks’ liquidity ratios, compels them to borrow and take extra trading risks to generate supposedly “risk-free” income,” Solanke said by email.
Fitch rating, which has a negative outlook for the Nigerian banking sector partly because of the CRR policy, notes, “It dampens banks profitability and is credit-negative for the sector as it restricts lenders’ ability to lend” thereby stifling access to credit for businesses.
To get a sense of how much the banks are losing as a result of the curious policy, if the N10.3 trillion held by the CBN is invested in government bonds at 10 percent, it would return a N1 trillion profit to the banks.
The amount (N10.3trn) is also 200 times the size of a N50 billion fund set up by the CBN to support households and small businesses whose livelihoods and business activities had been upended by the COVID-19 pandemic.
CRR rising in Nigeria but falling in other countries
The CRR rate is ever increasing in Nigeria at a time it is falling in other countries that are easing liquidity to stimulate credit flow in their economies and curtail the impact of the COVID-19 pandemic.
From Ghana to Rwanda and Kenya, the CRR rate is in low single digit territory. Even before the pandemic, some countries were already doing away with the requirement altogether in order to aid their banks, boost lending to the economy and stimulate growth.
“This is the time for the CBN to loosen up and ease liquidity rather than sit on capital or hike CRR,” said Obadiah Mailafia, a former deputy governor of the CBN.
“I don’t believe that freeing up capital at this time brings any significant inflationary pressures, so the CBN has no excuses for sitting on as much as N10 trillion,” Mailafia said by phone.
The CBN raised the CRR to 27.5 percent in January from the previous 22.5 percent rate, citing the need to mop up excess liquidity in the banking system to curtail inflation.
The CBN said at the time that banks were able to apply for a portion for the release of their CRR if they had a so-called “real sector friendly project” to fund.
Bankers say it has created the quagmire of a situation whereby one man has discretion over N10.3 trillion.
Both Fitch and the International Monetary Fund (IMF) have criticised the CBN’s CRR policy, saying it contradicts the CBN’s lending mantra.
“The CRR increase is an example of the kind of unpredictable regulatory intervention, seen especially since 2019, that poses challenges for Nigerian banks,” Fitch said at the time of the CRR increase.
The plethora of regulatory hurdles thrown at banks also means investors are less willing to buy their stocks, which have plunged to a three-year low.
Mathematically impossible CBN rules
Banks do not only have to contend with the world’s highest CRR but a regulatory directive to maintain a loan to deposit ratio of 65 percent, which means for every N100 in deposits with the CBN, banks must lend N65 in an economy that is still reeling from a contraction of 2016.
Both policies, including another mandate to maintain a 30-percent liquidity ratio, make it mathematically impossible to satisfy the CBN’s regulatory ratio requirements. Yet, the CBN has gone on to punish banks that fail to meet up.
“The math has stopped adding up for a while now yet the CBN doesn’t see the need to explain what is happening to anyone,” a banking source familiar with the matter said.
“The assumption is that the incessant debits of banks by the CBN over CRR or LDR breach is a strategy being used as a tool to manage FX demand as they usually happen days before an FX auction,” the source said.
“It’s especially curious that the CBN is on one hand saying it is keen to boost lending but on the other hand is aggressively mopping naira liquidity with spurious debits over CRR or LDR breaches,” according to the source.
The latest round of bank debits by the CBN was a sum of N219 billion, which the banks had to give up for breaching the CRR guidelines. That took bank debits made by the CBN, whether for breaching CRR or LDR ratios, to a total of N2.1 trillion in 2020. The CBN had taken N459.7 billion from the banks some weeks before and N1.4 trillion in April.
The IMF called for an elimination of the LDR policy during its article four consultation with monetary authorities earlier in the year, but the CBN has remained adamant.
Supporters of the CBN’s CRR and LDR policies say the policies are to stimulate lending to the real sector, which the banks were not doing, as they chose instead to park cash in low risk government securities.
“The banks are not keen to lend because of the risk-laden environment, if those risks are addressed it’s a no brainer that banks will boost lending since their profitability depends on it,” a business leader said.
“Other than that, the banks are happy to leave cash with the CBN rather than lose their initial capital by taking risky gambles with depositors’ money,” the person said.
(CRR) is the share of a bank’s total deposit that is mandated by the central bank to be maintained with the latter in the form of liquid cash.
