CBN Regulation Limits Banks’ Lending To 25% Of Every N100 Deposit –Analysts

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By Aliyu Galadima 

Nigerian Deposit Money Banks ,DMB, are facing stringent regulatory oversight in core banking business areas, with the apex bank limiting the amount of credit that can be created for each N100 deposit to 25%.

This lending cap followed a hike in cash reserve ratio to 45% and retention of 30% of the deposit taking in near naira liquidity, which are invested in short term financial instruments easily convertible to cash.

Banking experts said most of the big commercial banks source for on-lending opportunities from local and foreign interests to boost their portfolio. They noted that banks also borrow from foreign markets to support earnings, balance sheet growth drive.

In a growth-starved economy, private-sector support is frequently prioritised as part of the government’s long-term growth and development strategy. The most recent developments in the financial market contradict these expectations.

Funding is one of the most pressing issues confronting Nigeria’s private sector. According to analysts’ discussions with MarketForces Africa, there are two dimensions to this: access and borrowing costs.

Deposit money banks are expected to use specific criteria to determine who is eligible for loans. They stated that when access is available, borrowers must decide whether the costs of borrowing are acceptable in order to fund their projects or businesses without eroding benefits.

“For a struggling economy, the right thing is low interest rate plus accommodative level of inflation both of which Nigeria has lost due to timely policy action and/or inaction”, analysts said at the forum organised by MarketForces Africa.

Analysts said for economy to grow, private sector must be productive at optimal level. However, high interest rate environment, inflation and weak local currency has damaged upside potential across key economic sectors.

With recent cash reserve ratio hike to 45%, the apex bank further tightened rein on banks. The cash reserve requirement automatically limit amount disbursable as loans to customers, analysts said,  The increased regulatory adjustment added additional pressures on lenders ability to create credit, and support economic growth.

The apex bank maintained cash reserves ratio at 45% and expected commercial banks and other deposit taking institutions to keep 30% in assets that are easily convertible to cash.

Despite this, the apex bank expects banks to extend 65% of the total deposit collections as loans to private sector, failure to meet the target attract cash sterilisation. 

In its macroeconomic report for first quarter of 2024, FSDH said for every N100 deposit in commercial bank, 45% is kept with the CBN as cash reserves ratio, 30% is kept in Treasury bills as short term instrument to meet liquidity ratio demand.

Analysts expressed that only 25% is available for lending to individuals and businesses.  The monetary authority has maintained policy tightening despite the risks to economic growth, FSDH Research stated in its macroeconomic review.

Cash reserves ratio for both deposit money banks and Merchant Banks were affected in the two monetary policy committee meetings in 2024.  FSDH said the move will constrain the growth of credit.

“But we also observed that the pace of the increase in the MPR slowed from 400 basis points in February to 200 basis points in March”. 

In May, the apex bank committee delivered another 150 basis points increase in benchmark interest to 26.25% as inflation conditions in the country got dirty.  However, merchant banks cash reserve ratio softened.

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