In an unprecedented move, the Central Bank of Nigeria (CBN) debited N1.62 trillion from 10 banks in the first half of 2023 because they did not meet the 32.5% Cash Reserve Requirement (CRR). This list includes industry powerhouses such as Zenith Bank, United Bank for Africa (UBA), and Guaranty Trust Holding Company (GTCO).
The CRR mandates banks to keep a specific percentage of their customer deposits with the CBN. These deposits don’t earn interest and remain inaccessible for daily operations, tying up a significant amount of capital.
Our data shows a significant drop in mandatory reserve deposits for these banks from the previous fiscal year. For example, Zenith Bank’s reserve deposit at the CBN rose by N580.49 billion, reaching N2.25 trillion by June 2023, up from N1.67 trillion in 2022. UBA followed closely, experiencing a debit of N356.37 billion, increasing its mandatory deposit to N1.64 trillion from N1.28 trillion last year.
Despite the financial pressures from the CRR, GTCO maintained an average liquidity ratio of 36.6% during this period. Conversely, Unity Bank, a Tier-II bank, reported a drop in its mandatory reserve deposit to N69.05 billion in June 2023, down from N72.71 billion in 2022.
Many analysts have called on the CBN to rethink the current CRR rate, which it raised last September from 27.5% to 32.5% in an effort to combat inflation. Critics believe that this heightened rate dramatically restricts banks from giving out loans, which in turn slows down economic activities.
Fitch Ratings highlighted that these stringent policies suggest challenging times for Nigerian banks. Mahin Dissanayake, the Senior Director for Europe, Middle East, and Africa bank ratings at Fitch, stressed that Nigeria should align with the global trend of reducing reserve requirements to promote lending rather than enforcing a higher CRR that limits banks.
According to a report by This Day Live, David Adnori, Vice President of Highcap Securities Limited, recognized the challenge faced by the CBN. He pointed out that while the CBN uses the CRR to manage inflation and money supply, keeping these funds also curbs economic expansion. “Releasing these funds could trigger hyperinflation, harming the economy,” Adnori added.
A report from Agusto & Co highlighted that Nigeria has the highest reserve requirement in sub-Saharan Africa, outstripping nations like South Africa, Kenya, and Ghana, which have CRRs under 10%. This high level continues to affect the banking industry’s performance and liquidity.
The ongoing debate leaves many wondering how the CBN will balance inflation control with the need for economic stimulus in the future.
