Nigeria’s banking sector is facing a serious liquidity challenge following the Central Bank of Nigeria’s (CBN) decision to impose a uniform 50% Cash Reserve Ratio (CRR) on all banks. A new report by Renaissance Capital describes this policy as the highest globally and warns it is squeezing banks’ ability to lend, directly threatening credit growth and contradicting Nigeria’s economic ambition of reaching a $1 trillion GDP by 2030. The firm emphasizes that while the CBN aims to recapitalize banks to boost lending, the restrictive CRR undermines this objective by limiting funds available for loans.
Renaissance Capital’s analysis highlights that with CRR at 50% and liquidity ratio at 30%, only 20% of customer deposits are left for actual lending. This falls well below the regulatory Loan-to-Deposit Ratio (LDR) benchmark of 50%. The result is a conflicting policy mix—recapitalisation is meant to increase lending capacity, while the CRR hike is draining liquidity. Banks managing to meet lending benchmarks are reportedly relying on foreign deposits not affected by the domestic CRR, which only deepens the inconsistency in policy impact.
The financial cost to banks is severe. Renaissance Capital estimates that Nigerian banks lost N840.2 billion in income in the 2024 fiscal year due to the new CRR rule, nearly matching the combined losses of N862.1 billion from 2020 to 2023 under the old discretionary CRR policy. Analysts argue the new regime is not just restrictive, but significantly more damaging to profitability and liquidity. The report concludes that Nigerian banks have effectively moved “from frying pan to fire.”
In light of these challenges, the investment firm is urging the CBN to reconsider its approach. It recommends a reduction in the CRR to enhance liquidity and restore confidence in the financial system. Additionally, it suggests pairing such reforms with stricter disclosure rules for non-performing loans, drawing on policies like those in Ghana that require publishing defaulters’ names. Renaissance maintains that while financial discipline is essential, banks also need operational flexibility to support long-term economic goals.
With the next Monetary Policy Committee meeting scheduled for July, attention is focused on whether the CBN will adjust its stance. Renaissance expects banks to explore share reconstruction to optimize their post-recapitalization capital structures. The investment bank warns that without a timely policy shift, the current measures could choke the same institutions expected to finance Nigeria’s economic transformation, putting the $1tn GDP target at serious risk.
Source: Punch