Analysts and bank shareholders have urged the Central Bank of Nigeria (CBN) to reconsider its Cash Reserve Requirement (CRR) policy, which they claim have reduced banks’ liquidity position, making them unattractive to foreign investors and limiting their lending capacity.
Similarly, the Independent Shareholders Association of Nigeria (ISAN) has called for the CRR to be reduced for banks to declare large dividends that will encourage domestic investment.
This was revealed at a press conference held over the weekend in Lagos. The association stated that the Central Bank of Nigeria (CBN) CRR, which was designed to supplement the open market operation (OMO) in managing excess liquidity in the banking system, has failed to serve the purpose for which it was intended in recent times.
On behalf of the association, Sir Sunny Nwosu, the association’s founder, stated that “the recent increase in CRR by 5% to 27.5 per cent as opposed to 22.5 per cent has not also yielded the desired economic results after the first phase of COVID-19”.
The CBN requires banks to keep a 27.5 per cent cash reserve on which they earn no interest.
The CRR is a monetary policy tool used by the Central Bank to control the economy’s money supply. It raised the CRR from 22.5 to 27.5 per cent in January 2020, explaining that the decision was made to encourage banks to lend more to the private sector.
Analysts believe that the effective CRR in the industry is 40%, which means that for every N100 deposit, the bank must keep N40, which earns no interest with the CBN, and is left with N60 to work with to earn income.
According to Adesoji Solanke, Renaissance Capital’s director of Frontier/Sub-Saharan Africa Banks and Fintech, Nigerian banks have been significantly underweighted in the equity portfolio of international investors due to a variety of factors.
He explained that one of the major factors is the CBN’s cash reserve policy, which is unquestionably one of the highest in the world, if not the highest. “We believe the effective CRR is around 40%, which means that for every deposit made by a Nigerian bank, 40% is held at the CBN earning zero per cent”.
He went further to state that it has significant negative implications for the banks’ net interest markets and ultimately their ability to deliver return on equity which is a key factor of how investors would value banks in any market. He also posited that cash reserve is not high in isolation but high partly because the CBN is trying to manage the exchange rate dynamics of the country and forex is also a function of the fiscal side’s ability to generate revenue to drive everything else.
“This has negative implications for the Nigerian banks, so how the CBN and ultimately the government addresses that challenges will also drive how investors view the Nigerian banks from an equity investors viewpoint”.
Mr Ayo Adepoju, group chief financial officer of Ecobank Transnational Incorporated, also urged the CBN to reconsider the current CRR, which he claimed has reduced banks’ liquidity position to support lending and growth. Adepoju stated, “the central bank’s cash reserve requirement policy, which is very massive in terms of the impact on liquidity in the local market”.
“In terms of the biggest elephant in the room, which is in terms of the cash reserve requirements, the policy is about 27.5 per cent but the proxies of what we’ve seen in the market is that the industry average is well over 40 per cent. So, you see more of the liquidity sitting with the central bank, earning zero per cent”
“And when you have an industry average of cash reserve requirements are over 40 per cent that is the highest in any part of the globe as most of the markets is the cash reserve, either 5 or 10 in the lows of 12 or 13. Never would you see cash reserve going to forty-something per cent threshold. I understand the perspective of the central bank trying to manage excess liquidity in the market but at the same time, it is important to ensure that the banking industry has sufficient liquidity to power through growth in the market.”
According to data, 10 banks were cumulatively debited N4.95 trillion and N7.78 trillion respectively in CRR alone between 2019 and 2020.
A study of some banks’ CRR debit showed that Zenith Bank Plc’s restricted deposit with CBN increased from N680.26 billion in 2019 to N1.33 trillion in 2021, while FBN Holdings Plc’s restricted deposit increased from N843.44 billion in 2019 to N1.32 trillion in 2020.
Access Bank Plc’s CRR deposit with the CBN increased by 54% to N1.31 trillion from N848.85 billion in 2019, while Guaranty Trust Holdings Plc (GTCO) reported N1.03 trillion mandatory reserve with the CBN in 2020, up from N443.65 billion in 2019.
Nwosu stated that ISAN is concerned about the state of commercial banks and the safety of local portfolio investors’ investments, adding, “as retail investors, ISAN suggested either lowering the CRR to around 15% or paying three per cent interest on restricted bank deposits.”
He went on to say that the CBN’s continuous debit of banks under CRR poses a serious threat to the banking sector and creates a compelling impetus for long-term intervention in the real sector.
“The 27.5 per cent CRR impact on active 4.9 million retail shareholders has resulted in dismal dividends, banks’ net interest income, and the overall economy,” Nwosu said.
ISAN stated that the only way out of the CRR stalemate and to avoid policy incapacity of the national economy is for the CBN to pay interest on banks’ mandatory deposits, insisting that the CBN should pay interest to banks on restricted deposits to enhance banks’ obligations to the real sector, or reduce the CRR to 15% to allow banks to declare meaningful dividends that will encourage domestic investments.
It stated that “banks’ interim reports in 2021 show poor revenues as higher borrowing costs exacerbate the effects of COVID-19 and the oil price shock”.