As more multinational companies exit Nigeria over exchange rate volatility, economists and other Investment analysts fear that more businesses may face similar fate as the amount of banks’ deposits with the Central Bank of Nigeria (CBN) otherwise known as Cash Reserve Ratio (CRR) soared by 45.51 percent in the nine months to September 2023.

Financial analysts and economic experts have emphasized that the high CRR in Nigeria, one of the global highest, would constrain economic growth as it denies companies access to credit and raises the cost of credit.

Citing the impact of high cash reserve requirements debit on banks’ ability to lend to the manufacturing  sector, they charged the new leadership of the CBN to put machinery in place to stabilise the exchange rate as well as the fiscal situation to lower the CRR and ease its debilitating impact on the economy.

Mandatory reserve deposits represent a percentage of the customers’ deposits that are not available for use in the bank’s day-to-day operations and must be kept with the CBN. The amount, which is based on qualified assets, is determined by the CBN from time to time and is non-interest bearing.

The apex bank has been employing cash reserve requirements as a monetary policy tool to regulate money supply, tighten liquidity in the financial system, and contain inflation.

Within the review period, the Monetary Policy Committee (MPC) of the CBN raised the CRR to 32.5 percent from 27 percent, amid surging inflationary pressures and has since retained it at the rate.

Financial Vanguard’s inquest into the financial statements of 10  big banks in the country for the nine months period showed that their cash reserves rose to N13.81 trillion during the review period from N9.56 trillion a year ago, representing a 45.51 percent increase.

This also represents 21.6 percent of their total customer deposit, which stood at N64.06 trillion during the period.

The banks are Zenith Bank Plc, FBN Holdings Plc, Access Bank Plc, Guarantee Trust Holding  Company (GTCo) Plc, United Bank for Africa (UBA) Plc, Stanbic IBTC Holdings Plc, Fidelity Bank Plc, Sterling Bank Plc, Wema Bank Plc, and FCMB Group Plc.

Financial Vanguard’s analysis showed that tier-1 banks recorded the biggest increase in cash requirements, while more deposits of the tier-2 banks are quarantined with the central bank.

UBA recorded the highest CRR increase of 68.9 percent to N2.064 trillion from N1.23 trillion in 2022. This amount also represents 18.7 of its total customer deposit (N11.63trn).

This was followed by Sterling Bank, which recorded a 62.6 percent increase in its CRR to N431 billion from N265 billion in the corresponding period in 2022. This also represents 28.3 percent of its total customer deposit.

Others are Zenith Bank with 57.8 percent CRR increase; Fidelity Bank (+51.8%); Stanbic IBTC Holdings Plc (+43.8%) and FCMB Group Plc (+39.5%). The figures represent 18.9%, 22.3%, 34.3% and 24.4% of their total customer deposit respectively.

Economists’ views

Speaking on the development, Ayo Teriba, CEO, Economic Associate, said: “The implications to the real sector of the economy are obvious; it is obvious that the presence of CRR denies the real sector access to credit. These are loans that should have been extended to them. “These are monies that should have been used to create loans. So, it denies the real sector access to credit and it increases the cost of credit because if you take so much from the books of the banks and they go out to incur expense to mobilize deposits, and the CBN seizes 32.5% of that deposit, it puts pressure on the banks to try and recover the cost of mobilising the deposit that has now been frozen at zero interest rate.

“So it’s inefficient. It is unnecessary, it is killing the system.”

Continuing, he said: “CRR is not a monetary policy instrument that the monetary policy committee will be raising every now and then. It is adopted as a prudential rule. When it is used as a prudential rule, it is called a variable cash requirement. So, it is not mandatory for all banks. It is a rule that says that if any individual bank fails to manage its liquidity, and it has excess liquidity, that rule will apply to that bank for as long as it has excess liquidity. The rules cease to apply as soon as the bank keeps its liquidity under control.”

Speaking in the same vein, David Adonri, Executive Vice Chairman, Highcap Securities, said: “Nigerian bank’s cash reserve ratio is probably the highest in the world. It is normal to see a CRR of around 2-5% in many other countries. Above that ratio is indicative of a troubled financial or economic system. With the banks’ cash reserve held by CBN, it amounts to expropriation of their assets which could have been employed to yield income.

“Cash is generally held by banks as a short-term asset to meet cash withdrawals by demand depositors. However, the amount taken by CBN is so excessive that if part of it is available, it will enable banks to increase working capital finance to various economic units including manufacturing.”

Uche Uwaleke, Professor of Capital Market and Finance, who also stated that the current CRR at 32.5% is one of the highest in sub-Saharan Africa, noted that a high CRR effectively acts as a tax on banks given that it is not remunerated by the CBN.

“Its implication, therefore, is to constrain the ability of Deposit Money Banks to give out credit to the real sectors. The illiquidity conditions that it fosters help to fuel a high interest rate environment which is inimical to credit access and real GDP growth,” he added.

Way forward

Ayo Teriba stated that stable exchange rates and fiscal stability which means that the government won’t be taking money through Ways and Means are the two preconditions required to lower the CRR. “If these hold, the monetary policy can be eased. Right now, because of the unstable exchange rate and fiscal instability, you cannot ease monetary policy even when we recognise that the current configuration of the monetary policy is not fair,” Teriba said.

“We recognise that nothing much could be done except if the Ways and Means that the new CBN leadership met is taken off the books of the CBN. As soon as the Ways and Means are cleared, then they should turn to the CRR.

“We look forward to a date when the banks should be allowed to have access to the deposit they have mobilised without the threat of the CBN imposing a cash reserve ratio that applies to all banks regardless of their liquidity situation. We have to recognize that they need to clear up the ways and means met.

“However, there’s another obstacle in their way and that is the volatile exchange rate which is responsible for the surge in inflation. The only solution to the inflation rate is to build up a wall of foreign reserves and the exchange rate will stabilise behind the wall of reserves.

“You need to make the exchange rate stable and guarantee that there are adequate reserves to perpetuate that situation and regain monetary policy autonomy.

“You need to respect the fact that the real sector needs access to credit at a low rate and neither the high CRR nor the high MPR will make it possible for the real sector to access credit at all or at low interest rate,” he said.

On his own, Uche Uwaleke advised the MPC to consider reducing the CRR at its next meeting without prejudice to the CBN’s mandate of maintaining price stability.