The Central Bank of Nigeria (CBN) has approved a reduction in the Cash Reserve Requirement (CRR) of merchant banks to 10 per cent from the current 32.5 per cent. The change takes effect from August 1, 2023.
The central bank announced this in a circular dated July 14, 2023, and signed by CBN Director, Banking Supervision Department, Mr. Haruna Mustafa, which was directed to all merchant banks.
CRR is a monetary policy tool used by central banks to manage and regulate the money supply in an economy.
Specifically, it refers to the portion of deposits that banks are required to hold with the central bank.
Notably, an increase or reduction in the CRR could have several effects on banks and the overall economy.
While an increase in CRR will reduce the banks’ capacity to lend to borrowers, a reduction in CRR will make more funds available to the banks to lend to customers.
The CBN explained that the reduction in the CRR was expected to boost the banks’ ability to avail of increased infrastructure, real estate, and other long-term financing needed to support the development of the Nigerian economy.
The CBN circular with reference number: BSD/DlR/PUB/LAB/016/018, captioned “Review of the Cash Reserve Requirement (CRR) Regime for Merchant Banks,” was addressed to all merchant banks in Nigeria.
The letter read: “The Central Bank of Nigeria (CBN) hereby informs all Merchant Banks that it has approved a reduction in their cash reserve requirement from 32.5 per cent to 10 per cent effective August 1, 2023.
“The above regulatory measure is in recognition of the nuanced business model of the Merchant Banks, in particular their wholesale funding structure, regulatory restrictions from the retail market and permissible activities vis-a-vis conventional commercial banks.
“The measure is expected to boost the banks’ ability to avail increased infrastructure, real sector and other long-term financing needed to support the development of the Nigerian economy.
“The CBN will continue to monitor market developments and implement measures to address unique challenges the merchant banking sector faces. Please be guided accordingly,” the letter concluded.
Reacting to the measure, a former Commissioner for Finance in Imo State, Prof. Uche Uwaleke said it was a welcome development.
In a brief response, he stated that the measure would place the wholesale banks in a stronger position to attend to the financing needs of the real sector, while calling for a similar slash in the CRR of Deposit Money Banks (DMBs).
“I consider this a welcome development which will place the wholesale banks in a stronger position to attend to the financing needs of the real sector.
“By the same token, the CBN should consider reducing the CRR for DMBs from 32.5 per cent to, say, 25 per cent in view of the high MPR.
“The huge evidence of non-monetary influence on inflation supports this recommendation.
“Furthermore, it’s a no-brainer that increased liquidity in the banking sector following a reduction in the CRR has the potential of lowering interest rates with positive pass-through to the stock market,” he added.
The reduction in CRR for merchant banks will increase the amount of money they can lend, leading to enhanced liquidity.
However, a hike in CRR would require banks to keep a higher percentage of their deposits as reserves, which reduces the amount of money available for lending, resulting in a decrease in liquidity in the banking system.
A reduction in the CRR can also lower interest rates as more funds become available for lending.
