Nigeria’s banking sector is facing a severe liquidity crunch following the Central Bank of Nigeria’s decision to impose a 50% Cash Reserve Ratio (CRR) on banks. According to a report by Renaissance Capital, this move has significantly restricted banks’ ability to lend, threatening credit growth and turning market sentiment on Nigerian banks from bullish to bearish in the short term.
The CBN’s decision to raise the CRR to 50% while mandating banks to recapitalize to support lending for a $1 trillion economy by 2030 appears contradictory, analysts say. The recapitalization directive aims to strengthen banks’ capacity to lend, but the 50% CRR severely restricts their ability to deploy funds, effectively undermining the policy’s intent.
With the CRR at 50% and the liquidity ratio at 30%, banks are left with only 20% of customer deposits available for lending, well below the regulatory Loan-to-Deposit Ratio benchmark of 50%. This structural limitation makes it challenging for banks to meet domestic lending targets, even with higher capital buffers. Banks currently maintaining lending ratios above 20% are likely doing so through deposits sourced from international operations, which remain unaffected by the CBN’s domestic CRR policy.
The policy mix creates conflicting incentives, where recapitalization seeks to expand lending capacity, but the CRR hike stifles liquidity, forcing banks to prioritize balance sheet management over credit expansion. Unless adjusted, these measures risk stifling the very growth they were designed to support.
Renaissance Capital estimates that Nigerian banks lost a staggering N840.2 billion in income in the 2024 financial year due to the new CRR policy, surpassing the cumulative N862.1 billion lost under the old discretionary framework between 2020 and 2023. The firm notes that banks that are currently maintaining lending ratios above 20% are able to do so by leveraging deposits from foreign subsidiaries, which are not affected by the CBN’s domestic CRR rules. However, domestic operations are being suffocated.
The investment bank is calling on the CBN to revise its stance, recommending a reduction in CRR to boost liquidity and operational efficiency. A CRR reduction would enhance banking sector liquidity, reduce reliance on commercial paper issuance for liquidity management, and improve overall financial system efficiency. Additionally, the CBN should consider regulatory reforms, including tougher non-performing loan disclosures modeled after the Bank of Ghana’s policy.
The CBN’s intent to stabilize the financial system is acknowledged, but banks need “breathing space” to carry out recapitalization and other reforms without losing their ability to support the economy. The recent measures requiring banks to pause dividend payments, defer management bonuses, and halt foreign subsidiary investments effectively force the banking sector to bite the bullet. However, these institutions now require operational breathing space to implement these changes effectively.
