The Central Bank of Nigeria (CBN) has announced plans to slash Cash Reserve Ratio (CRR), reducing cash for merchant banks by 22.5% from 10% to 32.5%.
This was announced in a letter by Haruna Mustafa, director of banking supervision which was addressed to all merchant banks on Jul 14, 2023.
The circular reads thus; “The Central Bank of Nigeria 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 CBN will continue to monitor market developments and implement measures to address unique challenges the merchant banking sector faces. Please be guided accordingly,”
Commenting on the recent announcement by the CBN, former Commissioner for Finance in Imo State, Prof. Uche Uwaleke described it as a welcomed development while adding that the new measure would help place wholesale banks in a stronger position to help them attend to finance needs in the real sector.
He said “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,”
A reduction in the CRR would also help merchant banks increase the amount of money they can lend which would facilitate enhanced liquidity. It would lower interest rates, thereby making available more funds for lending.
What is CRR?
Cash Reserve Ratio is a specified minimum fraction of the total deposit of customers, which banks have to hold as reserves either in cash or as deposits with the central bank.