By Moses Obajemu
A total of N5 trillion belonging to the 23 banks in the country has been locked up and set aside as reserves to enable them meet the Central Bank of Nigeria’s (CBN) requirements as well as meet any sudden withdrawals.
Bank reserves are the cash minimums that must be kept on hand by financial institutions in order to meet central bank requirements. The banks cannot lend the money but must keep it in their vaults, on site or at the central bank, in order to meet any large and unexpected demand for withdrawals.
The N5 trillion represents money that the banks cannot trade with or lend to fund users but must set aside for emergency purposes.
The CBN set cash reserve ratio for Nigerian banks at 22.5 percent which means 22.5 percent of their deposits must be kept aside for meeting emergencies. In addition, the CBN encourages banks to have excess reserves to increase their capacity to meet their obligations.
Excess reserves are a safety buffer of sorts. Financial firms that carry excess reserves have an extra measure of safety in the event of sudden loan loss or significant cash withdrawals by customers. This buffer increases the safety of the banking system, especially in times of economic uncertainty.
As a way of freeing up more money for the banks to lend to the real sector, the CBN had, in a Jan 8, 2016 memo, reduced the cash reserve requirement by 500 points from 25 percent to 20 percent. The apex bank then had directed that funds freed by the reduction of the CRR should be lent to operators in manufacturing, mining, and the agricultural value chain.
However, it excluded trading activities and refinancing of projects from those that could benefit under the programme.
Recently, Central Bank mandated Nigerian banks to achieve 65 percent loan to deposit ratio to ensure that banks lend money to the real sector of the economy.
The directive implies that deposit money bank’s loan-to-deposit ratio (LDR) must now be 65 per cent, from the initial 60 per cent.
LDR is the percentage provision the bank is willing to give as loans out of its total cash deposit with the CBN.
This new directive is coming three months after the Central Bank announced a similar raise.
In July, the apex bank raised the loan-to-deposit ratio (LDR) of the commercial banks from 55 per cent to 60 per cent.
During the Monetary Policy Committee (MPC) meeting last month, members lamented the significantly low credit to the private sector relative to the absorptive capacity of the economy.
The CBN governor, Godwin Emefiele, said the committee urged deposit money banks to increase the percentage of their total deposit base available for lending.
He said the committee underlined the need to grow consumer, mortgage and corporate credit to drive aggregate demand and ensure a reduction in unemployment and an increase in output growth.
Apparently acting on the recommendation of the MPC, the banking sector regulator on Monday directed all deposit money banks to raise their loans-to-deposit ratio (LDR) from 60 per cent to 65.