It is big money – N8.3 trillion. And extra N5 trillion, you have the Nigerian budget fully funded. That is what the commercial banks were debited by the Central Bank of Nigeria (CBN) on the apex bank’s Cash Reserve Ratio (CRR) policy. Yes, in 2020,CBN warehoused a staggering N8.3 trillion from banks, kicking the party up by 58% year-on-year, according to Nairametrics: “banks that fall below the CBN’s loan to deposit ratio requirement of 65% have the full weight of the CRR imposed on them.”
CRR is a tool which central banks use to control supply of money and manage inflation. Essentially, you use it to morph how much of their customers’ deposits are available to the reach of the banks. In other words, even though customers have deposited the funds, the apex bank does not make it available for banks to trade or invest with it.
In Nigeria, the apex bank sets a loan to deposit ratio (LDR) which banks have to meet. The LDR defines how much loans are made by banks to its customers as a ratio of their total deposits. When the LDR number falls below the apex bank’s threshold, it debits the bank from the pool of its customer deposits to calibrate, and puts it within the threshold.
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But interestingly, there is something happening here. The apex bank has been accused to be morphing this fund, and then using it to augment revenue shortfalls for the federal budget. As the Ways and Means financial invention becomes more popular, watch these debits to rise. Of course, provided that the apex bank will provide the funds when the banks need them, for their customers, the economic structural impacts would be minimal.
The LDR threshold to stimulate lending is a great policy; hope it does not get blown by Nigeria’s search for funds! Simply, I am hoping that CBN is focused on its monetary policy and not using LDR/CRR to magically make funds available to the federal government to fund the budgets. Following that windy path would be extremely risky if suddenly those funds could not be returned for their original owners – the customers!
This table explains the breakdowns.
Source: Nairalytics Research.
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In other words, the CBN is providing ‘backhand’ loan to the government, encouraging it to remain an irresponsible borrower, thereby distorting the economy as well.
Why are banks more comfortable with ‘losing’ the money to the CBN, instead of meeting the LDR? Because it’s a more attractive option than giving loans, so the policy addresses nothing, other than making free money available to the government.
We don’t want to take risks, but at the end we push everyone into a hole, scaling miseries and hopelessness.