March 8, 2024/CSL Research
The Central Bank of Nigeria (CBN) at its last Monetary Policy Committee (MPC) meeting held on 27 February 2024 raised the CRR for commercial banks to 45%, a 1,250 basis points increase from 32.5% previously bringing the CRR to its highest level in history.
The Cash Reserve Ratio (CRR) is one of the monetary policy tools used by central banks to regulate the money supply in an economy and maintain price stability. It is a specified percentage of a commercial bank’s total deposits that must be held in reserve in the form of cash with the central bank. By adjusting the CRR, central banks aim to influence the amount of money available for lending and spending in the economy.
It is crucial to recognize that the efficacy of augmenting the Cash Reserve Ratio (CRR) as a monetary policy instrument is contingent upon several factors. These include prevailing economic conditions, the responsiveness of banks, and the efficiency of transmission mechanisms within the financial system.
Given these considerations, the effectiveness of increasing the CRR as a strategy to curb inflation in Nigeria becomes a subject of uncertainty. The nation’s limited financial inclusion, coupled with a substantial portion of money circulating outside traditional banking channels, further diminishes the potential impact and scope of monetary measures.
With the anticipated rise in the Cash Reserve Ratio (CRR), we anticipate a reduction in banks’ liquidity, leading to a potential limitation on their lending to the real sector. This effect is particularly pronounced in a high-interest rate environment, where banks might opt for the security of riskless government instruments. Such a scenario poses a significant threat to the overall growth of economic output.
Despite these apprehensions, the MPC remain resolute in the belief that sustaining economic expansion hinges on maintaining an environment characterized by low and stable inflation. Consequently, the MPC continues to prioritize price stability over immediate output growth.
In our assessment, given that numerous banks have already maintained effective Cash Reserve Ratios (CRR) significantly above 32.5%, and some even at levels as high as the newly set 45%, the anticipated impact on overall profitability, may be somewhat less pronounced than initially expected. Our investigations, corroborated by statements from the CBN governor, reveal an average effective CRR of approximately 40%.
Essentially, this implies a modest 5% uptick. However, even a seemingly modest 5% increase in the CRR signifies a substantial volume of deposits being sterilized. Consequently, we anticipate a negative impact on banks’ profitability as it entails more funds being set aside without the opportunity to earn interest on such funds.
