CBN Counterproductive Policy Hurting Nigerian Banks

• CBN Counterproductive Policy Hurting Nigerian Banks

Analysts have called the Central Bank of Nigeria’s policy of 27.5 percent cash reserve ratio and 65 percent loan-to-deposit ratio counterproductive given the current economic situation.

The apex bank wants deposit money banks to expand lending into the falling economy and at the same time increased banks’ cash reserves, the means with which they are to stimulate the economy as the nation grapples with the negative impact of COVID-19.

“Policy signaling from the Central Bank of Nigeria has been extremely contradictory,” said Ronak Gadhia, a banking analyst at EFG Hermes Research in London. “It is hard to manage the two policy objectives concurrently, especially in the current environment,” so banks are instead topping up cash reserves rather than accelerating lending, even if it means being penalized, he said.

The central bank needs to increase spending to support an economy predicted by the Nigerian Minister of Finance to contract by 4.4 percent this year if properly managed and 8.9 percent if the apex bank failed to deploy the right policy. Despite the negative impact of coronavirus on new job creation, wages and consumer spending, Nigeria’s inflation rate is presently at 24 months high of 12.34 percent. Critics have slammed monetary authorities for fueling prices by blocking rice and other food imports and also for flooding the market with cash by curbing access to the nation’s short-term bond market.

Presently, Nigeria’s cash reserve ratio is more than 10 times that of South African Banks and six times of what Kenyan banks are required to maintain. While the central bank had maintained the high deposit as reserves to curtail rising inflation, funds needed to contain the negative impact of COVID-19 and mitigate business risks would suffer.

“Nigerian banks are having to work significantly harder than banks elsewhere in the world to deliver profitability,” said Renaissance Capital analyst Adesoji Solanke.