Liquidity Crunch Hits Nigerian Banks Amid 50% CRR Mandate

Nigeria’s banking sector is grappling with a severe liquidity crunch following the Central Bank of Nigeria’s imposition of a uniform 50 percent Cash Reserve Ratio (CRR).

A research note from Renaissance Capital has raised concerns that the move, though aimed at stabilising the financial system, may undermine efforts to grow the economy.

The CRR, which requires banks to hold half of their total deposits with the apex bank, limits available funds for lending. Analysts argue that the policy contradicts the CBN’s goal of achieving a $1 trillion economy by 2030 through expanded credit access.

According to the report, Nigerian banks now have only 20 percent of customer deposits available for lending, below the regulatory loan-to-deposit ratio benchmark of 50 percent. The current policy shift, replacing earlier discretionary CRR debits, is said to have caused banks to lose an estimated ₦840.2 billion in income in 2024 alone.

Renaissance Capital warns that this policy, combined with recapitalisation directives, presents conflicting incentives. While recapitalisation is meant to bolster lending capacity, the CRR restriction forces banks to prioritise liquidity over credit expansion.

The firm recommends a CRR reduction to ease liquidity pressure, suggesting this would improve financial system efficiency and reduce reliance on commercial paper for liquidity management. It also calls for stronger non-performing loan disclosures, including naming individual loan defaulters, similar to recent measures adopted by Ghana.

The report notes that some banks may pursue share reconstruction to reduce outstanding shares post-recapitalisation. This would help improve earnings per share (EPS) and dividend per share (DPS), particularly for mid-tier institutions like Fidelity Bank and FCMB.

With the Monetary Policy Committee set to meet in July, stakeholders are watching closely for possible adjustments that could alleviate the sector’s liquidity strain and stimulate lending activity.