50% CRR deposit with CBN constrains banking sector’s profitability, says Fitch

Fitch Ratings has expressed that 50 per cent Cash Reserve Ratio (CRR) with Central Bank of Nigeria (CBN) constrained banking sector’s profitability

Speaking during a recent webinar co-hosted by Fitch and Renaissance Capital, Tim Slater, Director for African Banks at Fitch Ratings, said the sector continues to face regulatory hurdles, most notably the CRR, which requires banks to deposit 50% of their naira deposits with the CBN without earning any interest. 

The cash reserves placed at the Central Bank are unremunerated and therefore constrain the banking sector’s profitability,” Slater stated. 

He revealed that as of December 2024, unremunerated cash held at the Central Bank accounted for a substantial 17per cent of total banking sector assets, up from 12per cent in 2016 and represented 46% of naira deposits, compared to 27per cent in 2016.  

This, he said, significantly limits banks’ ability to extend credit or generate returns on assets. 

However, while the official CRR was raised from 32.5per cent to 50per cent, Slater noted that the actual burden on banks was previously more severe due to ad hoc debits imposed under the former CBN leadership. 

“The previous leadership tended to force banks to place cash at the Central Bank on an ad hoc basis whenever it perceived high pressure on the exchange rate,” he explained. “This often resulted in actual cash reserve levels far exceeding the official requirement.” 

According to Slater, this practice has changed under the current CBN leadership. The actual CRR now aligns more closely with the official requirement, bringing greater consistency and predictability. 

“So, although the official requirement has increased significantly, the amount of cash placed at the Central Bank has not,” he said. “This greater transparency in how the requirement is applied is helping banks plan better and manage their tight liquidity more effectively.” 

The CRR requirement is certainly the most significant, but other regulations and policy actions by the authorities have also negatively impacted the banking sector’s financial profile.