The amount of money or reserve deposit that Nigerian lenders are required by regulation to keep with the central bank is soaring as a result of tighter liquidity conditions, which could more than half the pace of loan growth in a country where small businesses are in need of credit facilities to thrive.
For the first three months through March 2024, the largest lenders have a combined mandatory cash reserve deposit with the central bank to a tune of N15.03 trillion, and that is 24.58 percent higher than 2023’s N12.07 trillion, according to data gathered by MoneyCentral.
Mandatory reserve deposits with central banks represent a percentage of customer deposits (prescribed from time to time by the central bank) which are not available for daily use. For the purposes of the Statement of cash flow, this balance is excluded from cash and cash equivalents.
“It reduces banks’ ability to create loans. It all depends on what the central bank wants to achieve. Economic growth is not a priority at the moment, instead, the regulator is using its monetary policy tools to fight inflation as it has hiked the monetary policy rate,” said Johnson Chukwu, managing director and CEO of Cowry Asset Management Limited.
“With 45 percent of deposits at the Apex bank and combined with liquidity ratio, lenders have been hamstrung,” Chukwu.
Total deposits of listed lenders stood at N50.04 trillion as at March 2024, which is 31.48 percent higher than 2023’s N38.05 trillion, according to data from MoneyCentral.
To help curb naira liquidity, rein in inflation and stabilise the exchange rate, the apex bank has hiked the CRR for the industry to 45 percent from 32.5 percent.
It must be noted that the country’s CRR is one of the highest in the world, but it appears the regulator’s hands are tied as drastic actions has to be taken to stabilise the economy.
Nigeria’s headline inflation rate increased to 33.69 per cent relative to the March 2024 headline inflation rate which was 33.20 per cent, according to the nation’s statistics bureau.
Analysts have warned that stringent measures to rein in price pressures such as higher Cash Reserve Ratio (CRR) will be deleterious to profits, as reserves deposited at the central bank are unremunerated.
“When customer deposits rise, banks are required to top up their cash reserves at the CBN accordingly. However, when deposits fall, reserves are not released back to banks. As a result, the CBN holds significant cash reserves in excess of the CRR, with cash reserves for some banks as high as 40 percent of LC deposits – a major drag on their lending capacity and profitability,” said global rating agency, Fitch.
“With the CRR now set even higher, we believe banks may increasingly look to tap wholesale funding, such as LC debt, as an alternative to LC deposits, to support lending while circumventing the high CRR,” said Fitch.
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