The CBN yesterday, cut Public sector CRR from 75% to 31% and also increased private sector CRR from 20% to 31%. Two lead research analyst have weighed in on the issue by offering their perspectives of what this could mean for Nigerian banks. Here are their views;
The Managing Director, Head, Africa Macro Global Research at Standard Chartered Bank, Razia Khan, said although the measure has resulted in an eventual tightening, the immediate impact on market liquidity will depend on the ratio of private sector to public sector deposits in the Nigerian banking system.
She explained that if the ratio is 80:20, the CRR harmonisation has a neutral impact on liquidity in the banking system. However, if the ratio is closer to 70:30, the CRR harmonisation should see some injection of liquidity back into the banking system.
Khan described the MPC decision as a surprise move. The public sector CRR, previously set at 75 per cent, is reduced to 31 per cent while the private sector CRR is raised to 31 per cent from a previous 20 per cent.
She said the full impact of these measures will depend on the policy steps that are implemented soon after Nigeria’s political transition on 29 May. “Currently, with growing anecdotal reports of public-sector arrears involving the payment of salaries by state governments as well as payments to contractors, this combination of measures is likely to signal an eventual tightening of policy. Public-sector deposits in the banking system have been under pressure for some months – following the reduction in oil prices and consequent pressure on the monthly allocation of oil earnings to the three tiers of Nigerian government,” she said.
Continuing, Khan said plans to eventually move to a more comprehensive Treasury Single Account (TSA) should, in future, reinforce the tightening bias of the CRR harmonisation.
Khan said private-sector deposits are expected to dominate the Nigerian banking system and that the private-sector CRR hike is, therefore, the more important element of the harmonisation.
“Could this be the precursor to eventual foreign exchange liberalisation? While comments by the CBN governor suggest that no restrictions are in place, the current system is unlikely to be sustainable, given that foreign exchange reserves bear the brunt of Nigeria’s adjustment to external shocks. We believe that eventual foreign exchange liberalisation will still be required,” she said.
Khan said calculations, based on data available from February, suggests a rough 73:27 ratio of private sector deposits to public sector deposits. “If this still holds true, (and a lot has changed since February) we expect to see the injection of some liquidity back into the banking system. Banks that are more reliant on public sector deposits will be the key beneficiaries of this additional injection of liquidity,” she said.
The Equities Market Head at Renaissance Capital (RenCap), Oladele Solanke, said across the four Sub-Saharan African countries, Nigeria’s banking sector has the highest CRR. Countries like Kenya have a CRR of 5.25 per cent, Rwanda five per cent and Ghana nine per cent.
The CRR policy, he said, implies significant increase in the banks’ cost of funds, a tensed pressure on the Net Income Margin (NIM) as a larger proportion of the deposits will now be held in CBN’s coffers as reserves.