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Monetary tightening freezes commercial banks N17.3trn

Monetary tightening by the Central Bank of Nigeria (CBN) in a bid to curb stubborn inflation is restricting lenders (commercial banks) from extending credit to…

Monetary tightening by the Central Bank of Nigeria (CBN) in a bid to curb stubborn inflation is restricting lenders (commercial banks) from extending credit to support the ailing economy.

Analysis by Daily Trust revealed that the mandatory reserve deposits with the central bank (cash reserve) surged by 70.37 per cent to N17.26trn as at December, 2023, from N10.13trn the previous year.

The CRR requires banks to park an increasing amount of local currency deposits with the central bank and restricts their ability to lend as the reserves are only available for intervention.

Zenith Bank has N3.90trn mandatory reserve deposits with the central bank (cash reserve); Access Bank N3.10trn; FBN Holdings N2.08trn; United Bank for Africa (UBA) N2.68trn; Guaranty Trust Holdings N1.64trn; Fidelity Bank N1.17trn; First City Monument Bank (FCMB) N776.54bn; Stanbic IBTC Holdings N927.58bn; Sterling Bank N450.29bn and Wema Bank N503.25bn.

The country’s CRR of 45 per cent is one of the highest in the world.

Similarly, the CBN announced a review of the loan-to-deposit ratio (LDR) for banks, from 65 per cent to 50 per cent to align with the current monetary tightening.

LDR is used to assess a bank’s liquidity by comparing its total loans to its total deposits.

CBN disclosed the increase in a circular on Wednesday titled: “Re: Regulatory Measures to Improve Lending to the Sector of the Nigerian Economy”, signed by Adetona Adedeji, its acting director of the banking supervision department.

“Accordingly, the CBN has decided to reduce the LDR by 15 percentage points to 50 per cent in a similar proportion to the increase in the CRR rate for banks.”

It noted that all DMBs are required to maintain this level and are further advised that average daily figures shall continue to be applied to assess compliance.

Elevated rates could further restrict credit to support the economy – Experts

Analysts at leading professional services firm, KPMG, said elevated rates could further restrict the ability of banks to channel credit to support the economy’s ambitious growth drive.

“Thus the restrictive monetary policy environment further casts shadows on the attainability of the government’s economic objective,” KMPG added

It is practically difficult for the economy to attain the desired economic growth amid stringent liquidity conditions. Small businesses need loans at reasonable rates to thrive, but a lot of them have folded up and new ones are not sprawling up.

Speaking on the reduction on LDR, analyst at Afrinvest said: “In our view, this downward review of LDR allows banks comply with the 45.0 per cent CRR directive and eases off pressure on the lenders considering the restrictive nature of other CBN directives, including the Net Open Position (NOP) ceiling of 20.0 per cent short and 0.0 per cent long. Thus, we believe this policy would enhance the ability of banks to sweat out assets without creating unnecessary risks.”

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