Fresh concerns have emerged over the impact of the Central Bank of Nigeria cash reserve policy on the country’s banking sector, with analysts warning that lenders may be losing as much as N2.5 trillion yearly in unrealised earnings.
A new report by investment firm Chapel Hill Denham stated that the high Cash Reserve Ratio requirement continues to limit banks’ ability to grow profits and expand lending within the economy.
Under the current framework, a large portion of customer deposits is kept with the central bank without generating interest income for financial institutions.
The News Chronicle reports that analysts described Nigeria’s reserve requirement as one of the highest globally, placing heavy pressure on liquidity and reducing the amount available for credit creation.
According to the report, banks are forced to hold back significant funds while still paying interest to depositors, creating a major earnings gap across the sector.
Experts believe the policy was initially introduced to control inflation and stabilise the foreign exchange market after past banking crises. However, there are growing arguments that the long term economic cost may now outweigh the benefits, especially as businesses continue to struggle with limited access to credit.
The report also suggested that a gradual reduction in the reserve requirement could unlock trillions of naira into the financial system and improve profitability across Nigerian banks.
