Fitch Ratings Fault CBN CRR Policy

Fitch Ratings, has forecast that punitive policies by the Central Bank of Nigeria (CBN), especially the Cash Reserve Ratio (CRR) debits on Nigerian banks, will negatively impact on their earnings.

According to the rating firm, this is coming at a time when most other countries are giving banks extra leeway to fight the economic fallout of the coronavirus.

The Senior Director for Europe, Middle East and Africa at Fitch, Mahin Dissanayake, in an interview, said:

“The Central Bank of Nigeria has been highly interventionist. Where peers like South Africa and Kenya followed the global trend of giving banks more room to lend, Nigeria hasn’t budged. Instead, it stuck with a cash reserve ratio that compels lenders to park 27.5% of their deposits with the central bank.’

He said, “Nigerian banks compared to other markets operate in a volatile environment. The banks have to deal with economic shocks, short credit cycles and persistent problems in the oil sector. They also have to deal with policy actions, policy uncertainty and regulatory risks.”

The CBN also debits the accounts of banks who fail to meet the 65% loan to deposit ratio (LDR) regulation, a policy which is aimed at stimulating credit in the economy.

The CRR debits on Nigerian banks have exceeded the two trillion naira mark in 2020 alone, some of which are speculated to be aimed at reducing the capacity of the lenders to participate in the foreign exchange market and as a result, reduce the pressure on the naira.

CRR is a mandatory part of bank’s total deposit, expressed in percentage, which a bank must maintain with the apex bank at all times and subject to change at the discretion of the regulator.

One of the major implications of the CRR debits for deposit money banks is the adverse material impact on their liquidity ratios.

In addition to minimum regulatory liquidity, loan-to-deposit, and cash reserve ratios of 30%, 65% and 27.5% respectively, Nigerian banks have to navigate an unpredictable operating environment due to external and macroeconomic factors.

A stable, predictable and more transparent regulatory/policy regime would help improve sentiments and restore confidence.