Central Bank Nigeria cracks the whip

Banking is becoming both interesting and challenging for Nigerian lenders. Seven months ago, the Central Bank of Nigeria (CBN) raised the Cash Reserve Requirement (CRR) on public sector funds yet again, from 50% to 75%. It had raised it from 12% to 50% last August. The policy has resulted in a large portion of government funds being removed from the vault of bank and kept with the Central Bank.


For the bigger banks that have little or nothing to lose, the Central Bank’s continuous tightening of monetary policy and instituting policies that cut back their profits, is seen as ‘interesting’.

However, for the smaller banks, there is much to worry about. Bismarck Rewane, managing director of Financial Derivatives Company, says these policies, coming in less than a year, represent a major challenge for lenders, especially those that are heavy on term deposits.

He said the Central Bank may further raise the CRR on public sector deposits from 75% to 100% before year-end.  

Adesoji Solanke, equities analyst at Renaissance Capital, said that with an average CRR of 20%, the banking environment does not allow for significant earnings growth, a trend that would be felt by all the banks.

He said smaller banks have struggled to improve their returns and will definitely face difficult times ahead. He advised lenders to be disciplined on costs land properly manage their impairment charges to allow improved earnings growth.

Strong loan growth is expected from the banks this year, as well as further upward adjustments to lending rates, as banks try to offset the lost income from the higher CRR.

“The banks have had to operate in an environment of tightening monetary policy for the past three years, which in relative terms has been unfavourable to the smaller banks, or Tier 2, banks. Their heavier reliance on term deposits has left them competitively disadvantaged as against the scale banks, and the concentration of market share by Tier 1 banks has forced Tier 2 banks to work harder to deliver improved returns in this environment,” Solanke said.

The bigger, Tier 1, banks include FirstBank of Nigeria, Guaranty Trust Bank, Zenith Bank, United Bank for Africa and Access Bank.

Tier 2 banks, such as Diamond Bank, First City Monument Bank, Fidelity Bank, Stanbic IBTC Bank and Skye Bank, have been affected by the CRR policy. However, some outliers have emerged and made the best of a bad situation in the evolving banking landscape. Diamond Bank and Stanbic IBTC Bank have been the positive outliers among the Tier 2 banks, delivering 20% return on equity (RoE) in 2013.

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