Nigeria’s banking sector may be losing trillions of naira annually due to the Central Bank of Nigeria’s (CBN) high Cash Reserve Ratio (CRR), according to a new report by investment banking and research firm Chapel Hill Denham.
The report titled “The Nigerian Banking Paradox: High Returns, Deep Discounts” argued that despite Nigerian banks posting some of the strongest returns on equity in Africa, they continue to trade at deep discounts compared to peers in South Africa and Morocco because of macroeconomic concerns and restrictive regulations.
The report identified the CBN’s 50% CRR policy as one of the biggest constraints on profitability, stating that it effectively sterilizes half of customer deposits without interest payments.
It means Nigerian banks are being forced to keep a very large part of customers’ money locked away with the Central Bank of Nigeria instead of using it to do business and make profits from it. Here is the simple breakdown: What is CRR? CRR means Cash Reserve Ratio. It is the percentage of customers’Read more
It means Nigerian banks are being forced to keep a very large part of customers’ money locked away with the Central Bank of Nigeria instead of using it to do business and make profits from it.
See lessHere is the simple breakdown:
What is CRR?
CRR means Cash Reserve Ratio.
It is the percentage of customers’ deposits that banks must keep with the CBN.
So if people deposit:
₦100 billion in a bank
and CRR is 50%
the bank must keep:
₦50 billion with the CBN
and can only use ₦50 billion for lending, investment, and operations.
Why is this painful for banks?
The report says the CBN does not pay meaningful interest on that reserved money.
So the banks are basically:
holding customers’ money,
but unable to use half of it,
and not earning much from the locked-up portion.
That is why the report used the word “sterilizes.”
In banking language, “sterilized funds” means money that is trapped and inactive.
Why did the report say banks may be losing “trillions”?
Banks normally make money by:
giving loans,
investing in treasury instruments,
financing businesses,
charging fees on financial activities.
If half their deposits are locked away, they lose opportunities to earn income from that money.
Example:
If a bank could normally earn 20% yearly return on ₦1 trillion:
But if half is sterilized:
only ₦500 billion can work,
meaning potential income drops sharply.
Across the whole banking industry, that “lost earning power” can amount to trillions of naira over time.
Why did the CBN introduce such a high CRR?
Usually to:
reduce excess money in circulation,
fight inflation,
stabilize the naira,
control liquidity in the economy.
Nigeria has battled:
high inflation,
FX pressure,
excess liquidity,
speculative attacks on the naira.
So the CBN uses CRR as a tightening tool.
Then why are Nigerian banks still posting huge profits?
That is the “paradox” the report is talking about.
Despite the restrictions, many Nigerian banks like:
Guaranty Trust Holding Company
Zenith Bank
United Bank for Africa
Access Holdings
still make strong profits because of:
High interest rates
FX revaluation gains
Digital banking income
Large customer base
Treasury operations
So investors see:
“strong profits today”
but also fear:
policy uncertainty,
CRR restrictions,
inflation,
naira risk,
regulatory surprises.
That is why Nigerian bank stocks often trade cheaper than banks in places like South Africa or Morocco even when profits are strong.
In plain village-market language
Imagine Mama Ngozi contributes ₦100,000 to a cooperative society.
But the government says:
“You must keep ₦50,000 inside a locked box.”
“You cannot trade with it.”
“You will not earn profit from it.”
Only ₦50,000 remains for business.
That reduces how much profit the cooperative can make.
That is basically what the report says is happening to Nigerian banks.
The statement simply means that Nigerian banks are being forced by the Central Bank of Nigeria (CBN) to keep a very large part of customers’ deposits with the CBN instead of using it for business activities like loans and investments. For example, if customers deposit ₦100 in a bank, the current 50%Read more
The statement simply means that Nigerian banks are being forced by the Central Bank of Nigeria (CBN) to keep a very large part of customers’ deposits with the CBN instead of using it for business activities like loans and investments.
For example, if customers deposit ₦100 in a bank, the current 50% CRR policy means the bank must keep ₦50 with the CBN and can only use the remaining ₦50.
The problem is that the money kept with the CBN usually does not generate interest or profit for the banks. Since banks normally make money by lending and investing deposits, locking away half of their funds reduces how much profit they could make.
Because Nigerian banks hold trillions of naira in deposits, the report believes they may be losing trillions yearly in potential earnings due to this policy.
The report also explains that although Nigerian banks still record high profits, investors value them lower than banks in countries like South Africa and Morocco because investors are worried about economic instability and strict regulations like the high CRR.
Why did the CBN create high CRR?
The CBN uses CRR to control:
inflation,
excess money in circulation,
and pressure on the naira.
By locking away bank money:
See lessbanks lend less,
people spend less,
inflation may reduce.
So the policy is mainly for economic control.