Thursday, 18 April 2024 04:50

CBN’s new monetary tightening measures starve banks of loanable funds, with dire consequences for the real sector

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Commercial banks, grappling with the Central Bank of Nigeria's (CBN) monetary tightening measures aimed at curbing persistent inflation, find themselves constrained in extending credit to bolster the faltering economy.

As per analysis by Daily Trust, mandatory reserve deposits with the central bank surged by 70.37 percent to N17.26 trillion by December 2023, up from N10.13 trillion the previous year. This surge in the Cash Reserve Requirement (CRR) compels banks to park a growing portion of local currency deposits with the central bank, limiting their lending capacity as these reserves are only accessible for intervention purposes.

Notably, Zenith Bank leads with N3.90 trillion in mandatory reserve deposits, followed by Access Bank with N3.10 trillion, and other major players holding substantial amounts, indicative of the profound impact of the CRR on the banking sector.

With Nigeria's CRR standing at 45 percent, among the highest globally, the stringent liquidity conditions further intensified with the CBN's revision of the loan-to-deposit ratio (LDR) from 65 percent to 50 percent to align with the ongoing monetary tightening.

In a circular titled "Re: Regulatory Measures to Improve Lending to the Sector of the Nigerian Economy," the CBN, through its acting director of the banking supervision department, Adetona Adedeji, announced this adjustment, emphasizing the need for banks to adhere to the revised LDR to stimulate lending.

However, analysts at KPMG caution that these elevated rates could impede banks' ability to support the economy's growth aspirations, casting doubt on the feasibility of government economic objectives.

Given the challenging liquidity environment, achieving desired economic growth becomes increasingly arduous, particularly as small businesses, reliant on affordable loans, face closures while new ventures struggle to emerge. Afrinvest analysts see the reduction in LDR as a reprieve for banks, allowing them to navigate the regulatory landscape while optimizing asset utilization without undue risk.

However, the broader impact of these policies on economic recovery remains a subject of scrutiny and concern.

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