Nigeria’s banking sector is losing an estimated N2.5 trillion in annual earnings to the Central Bank of Nigeria’s (CBN) high Cash Reserve Ratio (CRR) policy, a new report has revealed, raising fresh concerns over credit expansion, profitability, and economic growth.
The report, published by investment and research firm Chapel Hill Denham, described the CRR regime as one of the most significant structural constraints on the Nigerian financial system, arguing that it continues to tie down huge volumes of bank deposits that could otherwise be deployed for lending and investment.
Under the current framework, banks are required to keep a large portion of customer deposits with the CBN without earning interest, effectively sterilising liquidity in the system. Analysts say this has continued to weaken balance sheet efficiency despite strong underlying performance across the sector.
The report, titled “The Nigerian Banking Paradox: High Returns, Deep Discounts,” noted that while Nigerian banks remain among the top performers in Africa in terms of return on equity, they are still undervalued by investors due to regulatory tightening and persistent macroeconomic risks.
According to Chapel Hill Denham, the policy environment has created a contradiction in which banks report strong profits on paper but operate under severe liquidity constraints that limit their ability to expand credit to the real economy.
“The current regulatory structure imposes a uniquely restrictive burden on the banking sector,” the report stated, adding that the high CRR requirement continues to suppress potential earnings and restrict financial intermediation.
The firm further compared Nigeria’s reserve requirement with other countries, noting that South Africa operates a CRR of about 2.5 per cent, Kenya 4.25 per cent, Ghana 15 per cent, and Egypt 16 per cent, while Morocco has reportedly moved to a zero-reserve framework.
It warned that Nigeria’s comparatively high CRR remains a drag on credit creation, investment flow, and overall economic expansion.
In a scenario analysis, the report estimated that a reduction of the CRR from 50 per cent to 30 per cent could release as much as N8 trillion into the banking system, potentially boosting annual pre-tax profits by about N800 billion across the sector.
Despite this, the report acknowledged that the CBN’s tight monetary stance is aimed at managing inflationary pressures and stabilising liquidity conditions in the economy.
At its February 2026 Monetary Policy Committee meeting, the CBN retained the CRR for Deposit Money Banks at 45 per cent, while Merchant Banks were kept at 16 per cent and public sector deposits outside the Treasury Single Account framework at 75 per cent.
Analysts say the continued tightening reflects the apex bank’s cautious approach to inflation control, but warn that prolonged liquidity sterilisation could further slow credit growth and constrain real sector development.
Market observers also argue that investors are pricing Nigerian banks under the assumption that restrictive monetary conditions will persist, limiting valuation upside despite resilient earnings performance.
The report concluded that without a gradual recalibration of reserve requirements, Nigeria’s banking sector may continue to record strong profits on paper while contributing less effectively to economic expansion.
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