Financial Analysts and Bank’s Shareholders Urge CBN To Review Cash Reserve Requirement (CRR)

Financial Analysts and banks’ shareholders have urged the Central Bank of Nigeria (CBN) to access its  Cash Reserve Requirement policy (CRR). Critical stakeholders has explained that banks’ liquidity position has declined drastically making foreign direct investment nearly impossible to inject into the Nigerian economy.

The Independent Shareholders Association of Nigeria (ISAN) also demanded the immediate reduction of Cash Reserve Requirements in order to improve banks dividend prospects and stimulate investment locally and abroad.

Similarly, the Independent Shareholders Association of Nigeria (ISAN) also called for a reduction of CRR to make banks to declare impressive dividends that will encourage domestic investments.

This was made known at a press briefing at the weekend in Lagos. The association noted that, the Central Bank of Nigeria (CBN) CRR positioned to complement the open market operation (OMO) in managing excess liquidity in the banking system in recent times has failed to serve the purpose for which it was intended.

Speaking on behalf of the association, the founder of ISAN, Sir Sunny Nwosu said: “the recent increase of CRR by five per cent to 27.5 percent as against 22.5 percent have not also yielded the desired economic results after the first phase of COVID-19.”

The CBN stipulates that banks keep a cash reserve of 27.5 per cent on which they earn zero interest.

CRR is a monetary policy tool used by the Central Bank to control money supply in the economy. It had increased the CRR from 22.5 to 27.5 per cent in January 2020 a decision it explained was because they wanted banks to lend more to the private sector.

Analysts are, however, of the opinion that the effective CRR in the industry is 40 per cent meaning for every N100 deposit, the bank has to keep N40 which earns no interest with the CBN and is left with N60 which it can work with to earn income.

According to Renaissance Capital’s director, Frontier/ Sub-Saharan Africa Banks and Fintech, Adesoji Solanke, Nigerian banks have been a big underweight in the equity portfolio on international investors due to several factors.

He explained that, one of the major factors is “around the cash reserve policy of the CBN  which is certainly one of the highest in the globally if not the highest. We think the effective CRR is around 40 per cent which means that for every deposit that the Nigerian bank takes, 40 per cent is kept at the CBN earning zero per cent.

“This 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 investor would value banks in any market. The cash reserve is not high in isolation, it is 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.”

Also, group chief financial officer, Ecobank Transnational Incorporated, Mr. Ayo Adepoju urged CBN to review the current CRR which, he said, has reduced banks liquidity position to support lending and growth. Adepoju said: “the cash reserve requirement policy of the of the central bank, which is very massive, in terms of the impact on the 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.”

Meanwhile, Data has shown that 10 banks were cumulatively debited N4.95 trillion and N7.78 trillion respectively in CRR between 2019 and 2020 alone.

Analysis of some banks CRR debit revealed that Zenith Bank Plc’s restricted deposit with CBN rose from N680.26 billion in 2019 to N1.33 trillion in 2021, while FBN Holdings Plc’s restricted deposit hit N1.32 trillion in 2020 from N843.44 billion in 2019.

Access Bank Plc CRR deposit with CBN also grew to N1.31 trillion or an increase of 54 percent from N848.85billon in 2019, while Guaranty Trust Holdings Plc (GTCO) reported N1.03 trillion mandatory reserve with CBN in 2020 from N443.65 billion reported in 2019.

Nwosu stated that, ISAN is worried about the state of commercial banks and safety of local portfolio investors’ investments, saying, “as retail investors, ISAN suggested either a reduction of CRR to about 15 per cent or pay three percent interest on the restricted banks deposits.”

He added that the continuous debit of banks under CRR by CBN is putting the banking sector under serious threat and a compelling impotency toward sustainable intervention in the real sector.

Nwosu said: “the 27.5 per cent CRR impact on active 4.9 million retail shareholders have resulted into dismal dividends, banks’ net interest income and the general economy.”

ISAN noted that, the only way out of the CRR logjam foisted on banks and to avert policy incapacitation of national economy, is for CBN to pay interest on banks mandatory deposits, insisting that, CBN should pay interest to banks on restricted deposits to enhance banks obligation to the real sector or reduced the CRR to 15 per cent to enable banks declare meaningful dividends that will encourage domestic investments.

The association noted that “banks interim reports in 2021 shows poor revenues following higher borrowing costs as CRR hike further complicates banks currency flow already hit by fallout from COVID-19 and the oil price shocks.”