Deposit Money Banks in Nigeria may in for another challenge as they cannot lend the money but must keep over N855.3 billion in their vaults, on site or at the central bank, in order to meet any large and unexpected demand for withdrawals.
This is as a result of of the decision of the Monetary Policy Committee (MPC) of the Central Bank which increased their Cash Reserves Ratio (CRR) from 22.5 per cent to 27.5 per cent.
The MPC members on Friday voted 9 to 11 and increased the CRR by 500 basis points (bps) to 27.5 per cent while holding other policy parameters constant ? MPR at 13.5per cent, Liquidity Ratio at 30 per cent and Asymmetric corridor at +200bps/-500bps around the MPR.
According to an investment research analysts at both Afrinvest (West) Africa Limited and Zedcrest Capital Limited this CRR increase is expected to quarantine between ?812.6 to ?855.3 billion from the banks’ vaults given total deposits ranging from ?16.2 to ?17.1 trillion as at September 2019.
Abiodun Karipe, an Investment research analyst at Afrinvest and Oluwatosin Ayanfalu of Zedcrest Capital Limited,the Committee noted that the increase in Loan-to-Deposit ratio (LDR) and Open Market Operation (OMO) restriction has raised liquidity level while the land border closure continues to push inflation (Dec’19: 11.9%).
It should be noted that the sterilized funds belonging to over 23 banks in the country has been locked up and set aside as reserves to enable them meet the Central Bank of Nigeria’s (CBN) requirements as well as meet any sudden withdrawals.
Bank reserves are the cash minimums that must be kept on hand by financial institutions in order to meet central bank requirements.
The N855.represents money that the banks cannot trade with or lend to fund users but must set aside for emergency purposes
According to Afrinvest in a flash note with expected c.?4trillion OMO maturities over the first quarter of 2020, the Committee expects that the CRR increase should restrain system liquidity given that a large chunk of these maturities can no longer access the OMO market following the restrictions of Pension Fund Administrators (PFAs) and other local investors.
Meanwhile, available records show that average liquidity in the banking increased by 74.70 per cent in the month of December to close at N512.1bllion from N293.13bllion at the end of November 2019.
On January 3, 2020, the opening position of DMBs in the system rose above N1trillion for the first time since June 2016 to N1.45trilion.
The130.06 per cent increase in liquidity was partly due to OMO repayments of N446.80bllion as well as Federation Account Allocation Committee (FAAC) disbursements of N635.83billion .