Nigerian banks could be losing as much as N2.5 trillion in annual earnings because of the Central Bank of Nigeria’s high Cash Reserve Ratio, according to Chapel Hill Denham, as the industry faces growing pressure to deploy more of its deposits into loans and other income-generating assets.
The investment banking and research firm’s estimate has added financial-sector economics to an increasingly prominent debate over the CBN’s 45 percent CRR for Deposit Money Banks.
The issue is becoming more consequential as the amount of liquidity sterilised through CRR debits rises sharply.
Ayo Teriba, chief executive officer of Economic Associates, estimates that CRR debits have increased from about N14 trillion in 2023 to nearly N28 trillion currently, with additional liquidity absorbed through the CBN’s Special Deposit Facility.
The restriction creates a structural mismatch for banks. This is as interest must continue to be paid on customer deposits, while a substantial proportion of those deposits cannot be deployed in the normal lending and investment cycle.
Chapel Hill Denham, in its report The Nigerian Banking Paradox: High Returns, Deep Discounts, said Nigerian banks operate under a particularly restrictive regulatory framework despite producing strong returns on equity relative to many African peers.
The firm estimates that cutting the CRR from 50 percent to 30 percent could release approximately N8 trillion into the financial system and increase annual pre-tax profits by around N800 billion.
Nigeria’s reserve requirement is also an outlier by international standards.
Chapel Hill Denham puts the CRR at 2.5 percent in South Africa, 4.25 percent in Kenya, 15 percent in Ghana and 16 percent in Egypt, while Morocco has reduced its requirement to zero.
Only Venezuela, at 73 percent, has a higher requirement among the countries highlighted in the comparison.
The difference has become more striking as Nigeria’s macroeconomic conditions improve.
External reserves reached $54.6 billion on September 14, the highest in 18 years, while inflation moderated to 15.39 percent in August.
Ayo Teriba says the improvement should now allow the CBN to reconsider the extent of liquidity sterilisation.
He has proposed cutting the CRR to about one percent or eliminating it entirely.
The argument has gained additional relevance following the recapitalisation of Nigerian banks.
With stronger capital positions, proponents of CRR reduction argue that banks have greater capacity to expand lending without compromising capital adequacy.
Teriba also points to the reduction in foreign exchange and fiscal pressures that characterised the earlier phase of monetary tightening.
Net reserves, he said, have risen from approximately $4 billion during the period of severe pressure to about $42 billion currently.
The fiscal environment has also changed following the securitisation of the federal government’s Ways and Means obligations and reduced reliance on CBN financing.
The World Bank has backed a gradual reduction in the CRR, saying the move could improve credit allocation and lower borrowing costs.
The CBN, however, has retained the 45 percent requirement, with MPC member Aloysius Uche Ordu arguing that continued restriction remains appropriate while policymakers determine whether the recent decline in inflation is sustainable.
The unresolved issue is increasingly about the price of maintaining monetary restraint and how much bank income, credit and private-sector financing Nigeria is prepared to sacrifice while that assessment continues.
