Banks Keep N17.26trn With CBN as Monetary Tightening Restricts Lending

Monetary tightening by the Central Bank of Nigeria (CBN) is restricting lenders from extending credit to support an ailing economy even as the regulator seeks to curb stubborn inflation.

Data gathered by MoneyCentral shows mandatory reserve deposits with the central bank (cash reserve) have surged by 70.37 percent to N17.26 trillion as at December 2023, from N10.13 trillion the previous year.

The CRR requires banks to park an increasing amount of local-currency deposits with the central bank, and restricts their ability to lend as these reserves are only available for intervention funds.

It is interesting to note that the country’s CRR of 45 percent is one of the highest in the world as the minimum loans to deposit ratio of 65 percent further adds to tight liquidity conditions.

The Apex Bank had increased the Monetary Policy Rate (MPR), the benchmark interest rate, to 24.75 percent, from the previous 22.75 percent.

In March 2024, Nigeria’s headline inflation rate rose to 33.20 percent, up from 31.70 percent in February 2024.

Analysts at leading professional services firm KPMG said elevated rates could further restrict the ability of banks to channel credit to support the economy’s ambitious growth drive.

“Thus, the restrictive monetary policy environment further casts shadows on the attainability of the government’s economic objective,” KMPG added

Also, KPMG said the hike in interest rates is expected to attract greater foreign exchange (FX) inflows that would drive the appreciation of the Naira in the FX market.

The professional service firm said most of these gains are expected to come from portfolio investments as investors move to take advantage of the higher interest rate environment, but there are risks involved.

Zenith Bank has N3.90 trillion mandatory reserve deposits with central bank (cash reserve); Access Bank, N3.10 trillion; FBN Holdings, N2.08 trillion; United Bank for Africa (UBA) N2.68 trillion; Guaranty Trust Holdings, N1.64 trillion; Fidelity Bank, N1.17 trillion; First City Monument Bank (FCMB), N776.54 billion; Stanbic IBTC Holdings, N927.58 billion; Sterling Bank, N450.29 billion, and Wema Bank, N503.25 billion.

It is practically difficult for the economy to attain the desired economic growth amid stringent liquidity conditions. Small businesses need loans at reasonable rates to thrive, but a lot of them have folded up and new ones are not sprawling up.

“The central bank is draining liquidity from the system, but if you remove those deposits then lenders will be able to create more loans,” said Abiola Rasaq, former head of investor relations at United Bank for Africa.

Banks demonstrated robust growth and underlying strength in their lending portfolio amidst challenging market conditions as combined loans and advances to customers of the largest 12 lenders spiked by 58.02 percent to N39.59 trillion as at December 2023.

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