The Central Bank of Nigeria (CBN) has debited Zenith Bank, First City Monument Bank (FCMB) Limited and 11 other banks N356.1 billion for failing to meet its 27.5% Cash Reserve Requirement (CRR) obligation.
CRR is the minimum amount banks and merchant banks are expected to retain with the CBN from customer deposits.
Data made available by the CBN shows that Zenith Bank and Providus were debited N170 billion, N40 billion respectively, while FCMB was debited N39 billion, First Bank of Nigeria Limited N27 billion, Guaranty Trust Bank Plc N20 billion and Citibank N12 billion.
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The details showed that Stanbic IBTC bank, Union Bank of Nigeria Plc and Polaris Banks were debited N10 billion each, Keystone Bank was debited N6 billion, Ecobank Nigeria N5 billion, Sterling Bank Plc, N3.6 billion, Fidelity Bank N2 billion and Nova merchant bank N 1.5 billion. Zenith Bank and Providus Bank were the most hit while Fidelity Bank Plc was the least debited bank by the CBN.
The CBN’s decision has not gone down well with stakeholders who lamented that it will affect their gain, especially as the CRR is at 27.5%.
The policy which was introduced in 2019, has seen yearly uptick. In early 2020, the apex bank’s Monetary Policy Committee (MPC) increased CRR by five per cent from 22.5 per cent to 27.5 per cent over its intention to address monetary-induced inflation whilst retaining the benefits of its 65 per cent Loan Deposit Ratio (LDR) policy.
The CBN governor Godwin Emefiele said at the end of January 2020, MPC, that the CRR initiative will help Nigeria to stem the high tide of inflation and keep low interest rates.
“The committee is confident that increasing the CRR at this time is fortuitous as it will help address monetary-induced inflation whilst retaining the benefits from the Bank’s LDR policy, which has been successful in significantly increasing credit to the private sector as well as pushing market interest rates downwards,” he said.
Analysts quoted by ThisDay, believe cash reserves are historically between 5% and 10% of LCY deposits. But the CBN is using the CRR as an instrument to keep inflation in check and to keep the exchange market stable, therefore it is expected to keep rising.
Analysts at Agusto & Co. In a report titled, “Economic outlook for 2022. Our storyline”, explained that: “At the end of 2021, mandatory CRR of banks stood at about 35% of LCY deposits.
“Historically, cash reserves were between five per cent and 10% of LCY deposits. In Ghana and Kenya, there are currently eight per cent and 4.25% of LCY deposits respectively.
“In addition to these mandatory CRR, Nigerian banks hold “special bills”, issued by the CBN, that bear interest at 0.5% per annum. These “special bills” are not easily convertible into cash and are, in substance, interest bearing cash reserves.
“We estimate that cash reserves (including interest bearing cash reserves) were about 50% of LCY deposits at the end of 2021. We do not believe that the CBN will reduce this ratio significantly in 2022, as it continues to see this as a major instrument for maintain “stable” exchange rates.”
Another analyst who weighed in on the matter, the Vice President, Highcap Securities Limited, David Adnori said the introduction of CRR is a drastic monetary policy to control money supply in the banking system.
“If CBN fails to maintain its CRR policy, so much money will flow into the market and further deprecates the naira. Generally, the policy has not favoured banks because the fund is not yielding any interest and of no benefit to the productive sector.
“These are funds banks lend to the real sector to drive business activities, finance working capital of the productive sector and boost GDP but the CBN is holding it down. It is not a good development for the nation’s economy in general.
“However, CBN has its reasons and releasing these funds might result in hyperinflation which can damage the nation’s economy. It is like a double edge situation- if you don’t do it, the economy is damaged and if you do it, the economy also struggles,” he said, adding that the only way CBN can cut CRR is when inflation dropped to a single-digit rate.
However, there is concern that the impact of the policy is not encouraging as the economy continues to wobble. Bank shareholders are worried that in the long term, the CRR will continue to affect their profit while doing a little to minimize inflation.
The National Coordinator Emeritus, Independent Shareholders Association of Nigeria (ISAN), Sunny Nwosu had stated that the 27.5% CRR has not also yielded the desired economic results after the first phase of Covid-19. He explained 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.
“We urge CBN to seriously have a rethink on CRR and among other things to enhance the performance of the financial sector of the economy. The challenge character of Nigerian economy makes it imperative for CBN to pay interest on restricted deposits.
“Banks restricted deposits with CBN are idle funds. We argue that if these funds are with banks, certainly it will enhance their earnings, loans to real sector and returns for shareholders.
“If CBN can pay at least three per cent interest on the mandatory CRR deposits, it will go a long way in driving the real sector and the payment of robust dividends to shareholders,” ISAN said.