Nigeria’s banking sector is grappling with a severe liquidity crisis, triggered by the Central Bank of Nigeria’s (CBN) imposition of a 50% Cash Reserve Ratio (CRR), the highest globally. This policy, ostensibly aimed at stabilizing the financial system, has inadvertently choked lending capacity and jeopardized the nation’s ambitious goal of achieving a $1 trillion economy by 2030. Renaissance Capital, a leading investment bank, has issued a stark warning, highlighting the contradictory nature of the CBN’s policies. While mandating bank recapitalization to bolster lending for economic growth, the exorbitant CRR simultaneously restricts the deployment of funds, effectively negating the intended benefits of recapitalization. This conflicting approach has cast a shadow over the feasibility of the $1 trillion GDP target, as credit growth, the very engine of economic expansion, is now severely constrained.
The 50% CRR, coupled with a 30% liquidity ratio, leaves banks with a mere 20% of customer deposits available for lending, significantly below the regulatory Loan-to-Deposit Ratio (LDR) benchmark of 50%. This structural limitation impedes banks from meeting domestic lending targets, even with enhanced capital buffers. Banks currently maintaining LDRs above 20% achieve this primarily through deposits sourced from international operations, which remain unaffected by the domestic CRR policy. This disparity creates conflicting incentives, forcing banks to prioritize balance sheet management over credit expansion, ultimately stifling the growth the policies were designed to foster. Renaissance Capital’s analysis reveals that Nigerian banks suffered an estimated N840.2 billion in lost income in 2024 alone due to the new CRR policy, exceeding the cumulative losses incurred between 2020 and 2023 under the previous discretionary CRR framework. This stark reality underscores the detrimental impact of the current policy on banks’ profitability and liquidity.
The CBN’s simultaneous push for recapitalization and aggressive liquidity mop-up through the 50% CRR presents a perplexing policy paradox. The recapitalization directive aims to strengthen lending capacity, yet the CRR simultaneously restricts the deployment of these very funds, undermining the policy’s intent. The CRR, the percentage of a bank’s total deposits held with the CBN, effectively sterilizes a significant portion of banks’ lending capacity. The shift from discretionary CRR debits to a uniform 50% requirement has drawn widespread criticism from financial experts and market analysts, who see it as a counterproductive measure that hinders economic growth. The policy, introduced amidst efforts to recapitalize banks for Nigeria’s long-term economic transformation, is now suffocating the very institutions expected to drive lending and economic expansion.
Banks struggling to maintain lending ratios above 20% are increasingly reliant on deposits from foreign subsidiaries, which are not subject to the CBN’s domestic CRR rules. This reliance on external sources highlights the stifling effect of the CRR on domestic operations. Renaissance Capital advocates for a policy revision, urging the CBN to reduce the CRR to stimulate liquidity and operational efficiency. This reduction, they argue, would enhance banks’ lending capacity, lessen their reliance on commercial paper issuance for liquidity management, and improve the overall efficiency of the financial system. Alongside a CRR reduction, the firm recommends stricter non-performing loan disclosures, modeled after the Bank of Ghana’s policy, which mandates public listing of individual loan defaulters in annual reports. This increased transparency would further strengthen the financial system by promoting accountability and responsible lending practices.
The CBN’s recent measures, including pausing dividend payments, deferring management bonuses, and halting foreign subsidiary investments, have forced banks to make difficult choices. While these measures aim to consolidate financial stability, they also restrict banks’ operational flexibility and ability to support economic growth. Banks now require “breathing space” to effectively implement these changes and resume their crucial role in driving economic expansion. A CRR reduction, coupled with regulatory reforms such as stricter NPL disclosures, would provide this much-needed relief, enabling banks to navigate the recapitalization process and contribute meaningfully to Nigeria’s economic growth aspirations.
As the Monetary Policy Committee convenes in July, market participants eagerly anticipate potential policy recalibration. A reduction in the CRR and implementation of accompanying regulatory reforms could ease the pressure on the banking sector, revitalize credit growth, and pave the way for sustainable economic expansion. The report also suggests that banks may undertake share reconstruction exercises post-recapitalization to reduce the number of outstanding shares, potentially impacting their earnings per share (EPS) and dividends per share (DPS). These potential adjustments underscore the dynamic nature of the Nigerian banking sector and the ongoing need for policy adjustments to ensure its stability and contribution to the country’s economic future.
