Following the negative impact the Cash Reserve Requirement (CRR) requirement by the Central Bank of Nigeria (CBN) is having on banks’ profitability, shareholders of banks have expressed displeasure over N12.73trillion restricted deposits with the CBN that is not available for banking operations.
In a chat with THISDAY, leaders of shareholders’ rights groups called on the CBN to reduce the CRR drastically or pay interest on the restricted deposits to the banks.
THISDAY findings revealed that 10 banks suffered N7.78 trillion and N4.95trillion debit in Cash Reserve Requirement (CRR) sequesters by CBN between 2020 and 2019, respectively.
The apex bank since 2019 debited banks a chunk of their deposits as part of a mutually inclusive CRR and Loan to Deposit Ratio policy that is targeted at driving lending more to private sector.
The Monetary Policy Committee (MPC) of the CBN throughout 2019 maintained CRR of 22.5 per cent but in early January 2020, it was increased to 27.5 per cent.
The CRR is the amount the CBN debits from banks accounts in compliance with its monetary policy objective of mandatorily keeping cash on behalf of banks. The amount is not available for banks to use.
A reliable source in one of the Tier-2 banks in explained to THISDAY that continued debits of CRR by CBN is putting the banking sector under serious threat, stressing that the apex bank has consistently debited banks every Fridays.
When the policy was introduced, banks had complained bitterly about the CRR policy because of its impact on their Net Interest Income.
“By debiting banks for failing to meet CRR targets, the CBN is effectively denying banks of the ability to earn an income in customer deposits,” the source said.
Analysis of the banks results showed that Zenith Bank Plc’s restricted deposit with CBN moved from N680.26billion in 2019 to N1.33trillion in 2021, while FBN Holdings Plc’s restricted deposit was at N1.32trillion in 2020 from N843.44billion in 2019.
FBN Holdings in its 2020 financial year said: “Restricted deposits with central banks are not available for use in Group’s day to day operations. FBN Limited and FBNQuest Merchant Bank Limited had restricted balances of N1,271.81 billion and N39.37 billion respectively with CBN as at December 31, 2020 (December 2019: N828.69 billion and N8.00 billion).
“This balance includes CBN cash reserve requirement and Special Intervention Reserve. FBN Bank Ghana and FBN Bank Guinea also had restricted balances of N4.870 billion and N4.992 billion (December 2019: N2.84billion and N2.64 billion) respectively with their respective central banks.”
Access Bank Plc grew its deposit with CBN to N1.31trillion, an increase of 54 per cent from N848.85billon in 2019, while Guaranty Trust Holdings Plc (GTCO) reported N1.03trillion mandatory reserve with CBN in 2020 from N443.65billion reported in 2019.
Among the Tier-1 banks with mandatory reserves with CBN across N1trillion was United Bank for Africa Plc with N1.10trillion in 2020 as against N832.11 billion in 2019.
Another source in the industry told THISDAY that the current economic situation in the country is not conducive for banks to lend to real sector not to mention CBN taking from them without interest.
In his words, “CBN is still deducting from commercial for failing to meet up with the CRR of 27.5 per cent. The apex bank even debited last week from commercial banks on CRR. CBN is debiting from commercial banks with CRR below 27.5 per cent. The policies are creating a division in the banking sector because it is squeezing liquidity in the banking sector.”
The source added, “There is nothing precise with LDR in lending to real sector but to protect the foreign exchange rate from further devalue. The problem is not about cost of funding but infrastructure, power supply, and access to foreign exchange are still some problems facing the real sector. Imagine I give out a five per cent loan, and there is no light and road, there is no how do you expect those at the SMEs to pay back?”
Speaking with THISDAY, Chairman, Progressive Shareholders Association of Nigeria, Boniface Okezie, said shareholders have been advocating that CBN paid interest to bank.
According to him: “The funds deposited by banks to CBN are not used. If these funds are with banks, certainly it will enhance their earnings and returns to shareholders. It will create more banking expansion. The deposit fund is meant for bank customers and banks cannot make use of them.
“If CBN can pay at least three per cent on the mandatory funds collected from banks, it will go a long way to help banks to have more money and drive the real sector of the nation’s economy and pay robust dividend to shareholders.”
Collaborating with Okezie, the National Coordinator Emeritus, Independent Shareholders Association of Nigeria (ISAN), Sunny Nwosu also call on the CBN to pay interest on mandatory deposit collected from the banks
“I wanted to advocate that CBN pays interest to banks and it will actually reduce the pains. I also wanted to advocate that CRR should be reduced so banks can declare dividend that will make shareholders to be happy with. Every shareholder is expected to get a better reward on his or her investment. It is very important CBN has rethink on CRR, among others to enhance works performance, ”he said.
Analysts explained to THISDAY that the debiting from commercial lenders has become frequent in recent time as the CBN trying to curb speculation against the local currency as the country’s foreign exchange reserves continue to drop.
Analysts at Agusto & Co in its latest report said the CBN’s policies targeted at lowering interest rates have persisted especially given the dire need to stimulate the economy following adversities created by the pandemic.
They explained that: “given the need to moderate inflation amidst efforts to maintain a stable exchange rate, the CRR was increased and standardised to 27.5 per cent for both merchant and commercial banks. The standardised CRR was implemented alongside discretionary deductions.”
According to Agusto & Co, the industry’s restricted cash reserves exceeded N9.5 trillion in 2020 financial year and translated to an effective CRR of 37per cent.
It stated, “It is noteworthy that Nigeria has the highest reserve requirement in sub-Saharan Africa. South Africa, Kenya and Ghana all have CRR’s of below 10per cent. We believe the elevated CRR level moderated the Industry’s performance and liquidity position during the year under review.
“Assuming the sterile CRR were invested in treasury securities at five per cent, N482 billion would have been added to the Industry’s profit before taxation. This would have increased the Industry’s return on average equity (ROE) by 11per cent to 31.6per cent in the financial year ended 31 December 2020.”
In a recent report, Fitch Ratings had said that banks are facing tough times due to CRR policy limiting their capacity to grant loans to customers.
“The CBN has been highly interventionist, ”Mahin Dissanayake, senior director for Europe, Middle East and Africa bank ratings at Fitch, said.
“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 CRR that compels lenders to park keep a portion of their deposits with the regulator.
“Failure to meet the threshold results in the regulator debiting banks’ accounts with the shortfall. The central bank also dips into the accounts when lenders fail to extend 65 per cent of their deposits as loans, a measure that was introduced to stimulate credit. The rules “are aimed at two different monetary policies,” they are conflicting, he said.
Commenting on the matter recently, CBN governor, Godwin Emefiele said the decision of the MPC to raise the CRR is informed by recent inflationary pressure in the economy.
He stated that the decision to hold other rates was informed by the conviction of the committee members that there is a need to observe the response of the economy to several policies introduced by the CBN.