Nigeria’s central bank slashes cash reserve requirement for merchant banks

The Central Bank of Nigeria (CBN) has announced a substantial reduction in the Cash Reserve Requirement (CRR) for merchant banks, from 32.5% to 10%, effective from August 1, 2023. However, the central bank aims to enhance liquidity and enable merchant banks to extend more loans to support the development of the Nigerian economy.

The reduction was revealed in a circular dated July 14, 2023, issued by the CBN’s Director of Banking Supervision Department, Mr. Haruna Mustafa. Also, the decision comes as part of the CBN’s efforts to fine-tune monetary policy tools and regulations to promote economic growth and financial stability.

Experts welcome the move as a positive step to strengthen financing

Financial experts have welcomed the CBN’s decision, noting that it will strengthen the ability of merchant banks to provide loans to the real sector. Professor Uche Uwaleke, a former Commissioner for Finance in Imo State, described the reduction as a welcome development that will place wholesale banks in a stronger position to meet the financing needs of the real sector. He further suggested that a similar reduction in the CRR for Deposit Money Banks (DMBs) would be beneficial, considering the high Monetary Policy Rate (MPR) and the potential impact on interest rates and liquidity in the banking sector.

The reduction in the CRR for merchant banks is expected to increase the amount of money available for lending, leading to enhanced liquidity. It aligns with the government’s efforts to improve access to affordable loans, revive the economy, and spur growth. The measure recognizes merchant banks’ unique business model and wholesale funding structure, allowing them to better serve the real sector’s financing needs. While the reduction in the CRR is a positive step, experts emphasize the need for continued monitoring of market developments and implementing measures to address challenges specific to the merchant banking sector.

The new CRR requirement, set to take effect on August 1, is poised to benefit the six licensed merchant banks in Nigeria. As the CBN continues to fine-tune its monetary policies, striking a balance between liquidity, lending capacity, and regulatory frameworks remains crucial. The reduction in the CRR for merchant banks demonstrates the CBN’s commitment to facilitating increased financing for vital sectors, which is expected to impact the Nigerian economy positively.