The Central Bank of Nigeria (CBN) has announced a major change in its Cash Reserve Requirement (CRR) policy, which will affect how banks manage their deposits and loans. The CRR is the percentage of cash that banks must keep in reserves with the CBN, as a measure of liquidity and prudence.
According to a circular issued by the CBN on Friday, the apex bank will no longer debit banks’ accounts on a daily basis for CRR purposes, but will adopt a new mechanism that will be based on two factors: the incremental approach and the loan-to-deposit ratio (LDR).
The incremental approach means that the existing CRR ratios (32.5% for commercial banks and 10% for merchant banks) will only apply to the increases in the banks’ weekly average adjusted deposits, rather than the total deposits. This will give banks more flexibility and incentive to grow their deposits.
The LDR is the ratio of loans to deposits that the CBN expects banks to maintain, as a way of stimulating credit growth in the economy. The current minimum LDR is 65%, and banks that fail to meet this target will face a CRR levy of 50% of the lending shortfall, according to the CBN.
The CBN said that the new CRR policy is intended to facilitate banks’ capacity for planning, monitoring, and aligning their records with the CBN, and that it will provide banks with details of the applied charges and their underlying computation rationale.
The new CRR policy is expected to have significant implications for the banking sector, as it will affect banks’ profitability, liquidity, and lending activities. Some analysts have welcomed the policy as a positive step towards enhancing financial inclusion and economic development, while others have expressed concerns about the potential risks and challenges that it may pose for banks and their customers.
