Rising Cash Reserve Ratio Spurs Concerns Among Analysts

As multinational companies continue to exit Nigeria due to exchange rate volatility, economists and investment analysts are expressing heightened concerns about the escalating Cash Reserve Ratio (CRR) with the Central Bank of Nigeria (CBN). The CRR, a mandatory reserve deposit held by banks with the CBN, surged by 45.51 percent in the nine months leading up to September 2023, raising fears that more businesses may face a similar fate.

Financial analysts and economic experts are emphasizing the potential adverse effects of the high CRR, which is among the highest globally. They argue that it could constrain economic growth by limiting companies' access to credit and increasing the cost of credit.

Highlighting the impact on banks' ability to lend to the manufacturing sector, experts are urging the new leadership of the CBN to implement measures to stabilize the exchange rate and address the fiscal situation. The goal is to lower the CRR and alleviate its debilitating impact on the economy.

The CRR represents a percentage of customers' deposits that banks are required to keep with the CBN, restricting its use in day-to-day operations. The amount, determined by the CBN based on qualified assets, is non-interest bearing and serves as a tool for the central bank to regulate money supply, tighten liquidity, and control inflation.

During the review period, the CBN's Monetary Policy Committee (MPC) raised the CRR to 32.5 percent from 27 percent, citing surging inflationary pressures, and has since maintained it at that level.

An analysis of the financial statements of 10 major banks by Financial Vanguard reveals a substantial increase in cash reserves. Over the nine months, cash reserves rose to N13.81 trillion from N9.56 trillion, marking a 45.51 percent increase. This represents 21.6 percent of their total customer deposits, amounting to N64.06 trillion during the same period.

Leading banks such as Zenith Bank, UBA, Sterling Bank, and others recorded significant CRR increases, with UBA topping the list at 68.9 percent. The figures indicate potential challenges for businesses and underscore the urgency of addressing the current economic dynamics to ensure stability and growth.