ROI: Shareholders frown on effect of CRR on Nigerian banks’ revenues

*The Independent Shareholders’ Association of Nigeria urges the Central Bank of Nigeria to revisit the commercial banks’ mandatory Cash Reserve Ratio (CRR) towards  enhancing the performance of the financial sector of the economy

Isola Moses | ConsumerConnect

In regard to their expectations from Return on Investment (ROI), shareholders under the aegis of Independent Shareholders’ Association of Nigeria (ISAN) have expressed displeasure over the increase in the banks’ mandatory Cash Reserve Ratio (CRR) in the West African country.

ConsumerConnect reports Sir Sunny Nwosu, Founder of ISAN, said disclosed the group’s position in a statement issued Sunday, December 12, 2021, in Lagos.

CRR is a monetary policy tool used by the Central Bank of Nigeria (CBN) to control money supply in the economy.

Mr. Godwin Emefiele, Governor of CBN

The CRR empowers the central bank to sequester up 27.5 per cent of customer deposits held by commercial banks, effectively restricting the banks from accessing the money.

While urging shareholders Central Bank of Nigeria (CBN) to reduce the CRR of the Deposit Money Banks (DMBs) to 15 percent from 27.5 percent, or pay interest on the restricted deposits to the banks, Sir Nwosu disclosed that the Nigerian banks had over N12 trillion restricted deposits with the CBN.

The ISAN Chief, who is also Acting Chairman, R.T. Briscoe Plc, Director at Nigerian Aviation Handling Company Plc (NAHCO) and MRS Oil Nigeria Plc, alleged that the Bankers Bank’s decision to review most bank charges and fees downward, coupled with the hike in the CRR, amid expectations of increasing regulatory headwinds, was currently causing a setback in the sector.

The apex bank debited a chunk of deposits of banks since 2019 as part of a mutually inclusive CRR and Loan to Deposit Ratio policy that targeted at driving lending more to private sector.

He further stated: “It is noteworthy that Nigeria has the highest reserve requirement in sub-Saharan Africa. South Africa, Kenya and Ghana all have CRR’s of below 10 per cent.

“We believe the elevated CRR level moderated the industry’s performance and liquidity position during the year under review.”

Mr. Godwin Emefiele, Governor of CBN, was quoted to have acknowledged the measure  was part of efforts at curbing excess liquidity in the banking system in the country.

However, Nwosu argued that the CBN’s monetary policy has continued to pummel the banking sector of the economy, with multiplier effect on the equities market and loss of value-addition to shareholders.

ISAN Founder also noted: “After serious evaluation of the CRR and current AMCON scam, ISAN insists that CBN should pay interest to banks on restricted deposits to enhance banks obligation to the real sector.

“In the alternative the apex bank should reduce the CRR to 15 per cent to enable banks declare meaningful dividends that would encourage domestic investments.

“We urge CBN to have a rethink on CRR and among other things to enhance the performance of the financial sector of the economy.”

According to him, the challenge in the Nigerian economy has made it imperative for CBN to pay interest on restricted deposits.

Nwosu also said in the statement that “banks’ restricted deposits with CBN are idle funds. We argue that if these funds are with banks, certainly it will enhance their earnings, loans to real sector and returns for shareholders.”

Continued debits of CRR by the CBN, he noted, had put the banking sector under serious threat.

The apex bank is denying banks the ability to earn an income in customer deposits, Nwosu alleged.

Some Nigerian banks and CBN’s mandatory CRR

Meanwhile, analysis of some banks debited through the mandatory CRR indicated that Zenith Bank Plc’s restricted deposit with CBN rose from N680.26 billion in 2019 to N1.33 trillion in 2021, while FBN Holdings Plc’s restricted deposit hit N1.32 trillion in 2020 from N843.44billion in 2019, agency report said.

FBN Limited and FBN Quest Merchant Bank Limited had also restricted balances of N1.3 billion and N39.37 billion respectively with CBN as at December 31, 2020.

Futhermore, Access Bank Plc’s CRR deposit with CBN also grew to N1.31 trillion or an increase of 54 per cent from N848.85 billon in 2019, while Guaranty Trust Holdings Plc (GTCO) reported N1.03 trillion mandatory reserve with CBN in 2020 from N443.65 billion reported in 2019.

United Bank for Africa’s  mandatory reserves with CBN also increased to N1.10 trillion in 2020 as against N832.11 billion in 2019.

In his remarks on the development, Mr. Anthony Omojola, National Coordinator of ISAN, said banks’ interim reports in 2021 indicated poor revenues, following higher borrowing costs as CRR hike further complicated banks’ currency flow already hit by fallout from the COVID-19 pandemic and the oil price shocks.

The CBN warehousing of about N1.2trillion from the  banking system since it raised the CRR by five percent to 27.5 percent coupled with the AMCON ‘sinking funds’ called for serious concerns by all stakeholders, stated he.

Omojola added: “That the cumulative restricted deposits of banks so far as at 2020, if invested in treasury securities at five per cent, would have N482 billion added to the industry’s profit before taxation.

“The industry’s Return on Equity (ROE) would have increased by between 11percent and 31.6 percent as at (of) December 2020.”

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