By Nkiruka Nnorom
The recent increase in banks’ Cash Reserve Ratio (CRR) by the Central Bank of Nigeria (CBN) to 27.5 percent may frustrate the drive by the apex bank to increase credit allocation and stimulate growth in the real sector.
Bismarck Rewane, Chief Executive Officer, Financial Derivatives Company (FDC) stated this in his January 2020 Lagos Business School (LBS) Breakfast session themed: “Adapt or Perish – Alice Hills: It is not just about Sustainability but Economic Reality”, describing the move as apparent contradictions in monetary policy.
CRR is the share of a bank’s total deposit maintained with the CBN in the form of liquid cash.
Recall that the CBN had in its bid to increase banks’ lending to the real sector last year, raised the Loan-to-Deposit (LDR) of the banks twice. After raising the lending benchmark to 60 percent in June, the apex bank, again, raised the LDR to 65 percent and gave the Deposit Money Banks up to December 31, 2019 to comply even as it is believed that another increase is in the offing.
However, at the end of the last Monetary Policy Committee (MPC) meeting in January, the CBN increased the CRR by 500 basis points to 27.5 percent from the initial 22.5 percent in an attempt to mop liquidity from the banking system and curtail inflation.
But, speaking at the last LBS Breakfast session, Rewane observed that the move is counter-productive, saying that it clashes with competing objective of stimulating lending.
“After months of unorthodox measures compelling banks to extend credit, MPC raised CRR by 500bps to 27.5 percent with other parameters unchanged.
Though aimed at reducing excess banking sector liquidity in an attempt to curtail inflationary pressures and increase interest rates, CRR hike mops up N1.4 trillion (5.17 percent of M2) from banking system. Hike in CRR would drain banks of funds they would use to create loans,” he said.