Nigeria’s Central Bank announces revised Cash Reserve Requirement framework, stops daily debts

The Central Bank of Nigeria (CBN) has revamped its Cash Reserve Requirement (CRR) policy to enhance the banking sector’s operational efficiency.

This new framework, detailed in a letter to all banks, shifts from daily CRR debits to a more predictable mechanism, promising improved liquidity management for banks.

According to the central bank, it is “ceasing daily CRR debits and will be adopting an updated Cash Reserve Requirement (CRR) mechanism” that it said “is intended to facilitate your capacity for planning, monitoring, and aligning records of banks” with the CBN.

The CBN used to take a bit of the bank’s money every day to control how much money is out there in the economy. This process is being stopped and instead, they’re introducing a new way to do things.

The updated framework is implemented in two phases:

Incremental Approach: Applies existing ratios (32.5% for commercial banks and 10% for merchant banks) to increases in weekly average adjusted deposits.

• Simply put, banks have a certain percentage they need to keep aside and not use (for commercial banks it’s 32.5% of their deposits, and for merchant banks, it’s 10%). Now, this rule will only apply to any new money the banks get, not the total money they have all the time.

Lending Incentive: Imposes a 50% CRR levy on banks failing to meet the minimum Loan to Deposit Ratio (LDR), encouraging increased lending to the real sector.

• Simply put, if banks don’t lend enough money to people and businesses (there’s a minimum amount they’re supposed to lend out compared to the deposits they have), the CBN will charge them. They’ll take 50% of the amount the bank was short in lending. This is to encourage banks to lend more money.

Thus, the CBN will tell each bank exactly how much they need to keep aside or if they owe any charges because they didn’t lend enough money. They’ll explain how they figured these amounts out.

Key Takeaways for the Banking Sector and Economy

• By moving away from daily CRR debits, banks can better manage their liquidity, aiding in more effective financial planning.
• The linkage of CRR compliance to LDR targets nudges banks towards extending more credit, and supporting economic growth through increased access to finance.
• The CBN’s adjustment reflects its commitment to using monetary policy tools to foster a stable and growth-oriented banking environment.

Dr. Adetona S. Adedeji, Acting Director of the Banking Supervision Department at CBN who signed the circular not that the framework aligns with efforts to maintain monetary stability while encouraging economic expansion.

Optics: In essence, the CBN is trying to make it easier for banks to plan their money while pushing them to lend more money to businesses and people.

• This is meant to help the economy by making sure there’s enough money going around for people to start or grow businesses, buy things, and create jobs.