AHEAD of next month’s Monetary Policy Committee meeting, a new research note by Renaissance Capital has revealed that Nigeria’s banking sector is facing a severe liquidity crunch following the Central Bank of Nigeria’s decision to impose a 50 per cent Cash Reserve Ratio, a move analysts say is at odds with the country’s ambition of achieving a $1tn economy by 2030.
A new report by investment bank, Renaissance Capital, has warned that the higher CRR requirement, described as the highest in the world, has significantly restricted banks’ ability to lend, threatening credit growth and turning market sentiment on Nigerian banks from bullish to bearish in the short term.
The research note, seen by this newspaper on Tuesday, said, “In our view, the CBN’s decision to raise the Cash Reserve Ratio to 50 per cent while simultaneously mandating banks to recapitalise to support lending for a $1tn economy by 2030 appears contradictory. While the recapitalisation directive aims to strengthen banks’ capacity to lend, the 50 per cent CRR severely restricts their ability to deploy funds, effectively undermining the policy’s intent.
“The feasibility of the $1tn GDP target is questionable, given that a core rationale for recapitalisation was to spur credit growth, an outcome now constrained by the CRR’s liquidity drain. With CRR at 50 per cent and the liquidity ratio at 30 per cent, banks are left with only 20 per cent of customer deposits available for lending, well below the regulatory Loan-to-Deposit Ratio benchmark of 50 per cent.
“This structural limitation makes it challenging for banks to meet domestic lending targets, even with higher capital buffers. Notably, banks currently maintaining LDRs above 20 per cent are likely doing so through deposits sourced from international operations, which remain unaffected by the CBN’s domestic CRR policy. This policy mix creates conflicting incentives. While recapitalisation seeks to expand lending capacity, the CRR hike stifles liquidity, forcing banks to prioritise balance sheet management over credit expansion. Unless adjusted, these measures risk stifling the very growth they were designed to support.”
According to Renaissance Capital, the CBN’s simultaneous push for bank recapitalisation to support lending capacity and its aggressive liquidity mop-up through the 50 per cent CRR presents a conflicting policy stance.
“While the recapitalisation directive aims to strengthen banks’ capacity to lend, the 50 per cent CRR severely restricts their ability to deploy funds, effectively undermining the policy’s intent,” the report stated.
The CRR is the percentage of a bank’s total deposits that must be kept with the CBN and not used for lending or investment. The apex bank had previously employed discretionary CRR debits, but its shift to a uniform 50 per cent requirement is now drawing criticism from financial experts and market analysts.
Renaissance Capital estimates that Nigerian banks lost a staggering N840.2bn in income in the 2024 financial year due to the new CRR policy, surpassing the cumulative N862.1bn lost under the old discretionary framework between 2020 and 2023.
“Moreover, our estimates indicate that our covered banks incurred N840.2 billion in lost income during FY24 alone, compared to N862.1 billion in cumulative estimated losses during the FY20-FY23 period.
“This FY24 loss figure suggests that the 50 per cent CRR regime is proving more detrimental to banks’ profitability and liquidity than the previous discretionary CRR framework,” the analysts said.
The firm said the current policy has moved Nigerian banks “from frying pan to fire.”
“Unless adjusted, these measures risk stifling the very growth they were designed to support,” the report warned.
The policy, introduced amid efforts to recapitalise banks for Nigeria’s long-term economic transformation, is said to be choking the same institutions expected to drive lending and economic expansion.
The firm noted that banks that are currently maintaining lending ratios above 20 per cent are able to do so by leveraging deposits from foreign subsidiaries, which are not affected by the CBN’s domestic CRR rules.
“Domestic operations, however, are being suffocated,” the report said. Renaissance Capital is now calling on the CBN to revise its stance, recommending a reduction in CRR to boost liquidity and operational efficiency.
“A CRR reduction would enhance banking sector liquidity, reduce reliance on commercial paper issuance for liquidity management, and improve overall financial system efficiency,” it said.
The investment bank also called for regulatory reforms to accompany any such relief, including tougher non-performing loan disclosures modeled after the Bank of Ghana’s policy, which mandates public listing of individual loan defaulters in annual reports.
While acknowledging the CBN’s intent to stabilise the financial system, Renaissance warned that banks need “breathing space” to carry out recapitalisation and other reforms without losing their ability to support the economy.
“The CBN’s recent measures requiring banks to pause dividend payments, defer management bonuses, and halt foreign subsidiary investments effectively force the banking sector to bite the bullet. However, these institutions now require operational breathing space to implement these changes effectively.
“From an operational perspective, a CRR reduction would enhance banking sector liquidity, reduce reliance on commercial paper issuance for liquidity management, and improve overall financial system efficiency. A CRR reduction should be followed by more stringent non-performing loan disclosures. The CBN should take a leaf from the Bank of Ghana’s recent policy directive on listing of individual defaulted loans in annual audited accounts, alongside other measures,” the note said.
With the Monetary Policy Committee scheduled to meet again in July, all eyes are on the CBN for possible policy recalibration that could ease pressure on the sector and reignite credit growth. The report further noted that banks are likely to embark on share reconstruction exercises to reduce the number of shares outstanding post-recapitalisation
“Post-recapitalisation, we could see Nigerian banks embarking on share reconstruction exercises to reduce the number of shares outstanding. Banks with a large number of shares (exceeding 50 billion shares) could restructure their shares to improve their EPS and DPS. The two major tier-II banks (Fidelity Bank and FCMB) are more likely to embark on this to reduce their shares outstanding as they would have a material number of shares post-recapitalisation.”