Nigeria: Fitch - CRR Rule to Weigh On Nigerian Banks' Income

14 August 2020

Fitch Ratings has predicted that the Central Bank of Nigeria's (CBN) cash reserve requirement (CRR) policy will hurt Nigerian banks' earnings.

"The Central Bank of Nigeria has been highly interventionist," Bloomberg quoted senior director for Europe, Middle East and Africa bank ratings at Fitch, Mahin Dissanayake, to have said during an interview.

Where peers like South Africa and Kenya followed the global trend of giving banks more room to lend, Nigeria hasn't budged, with CRR at 27.5 per cent.

Failure to meet the threshold results in the regulator debiting banks' accounts with the shortfall.

The central bank also dips into the accounts when lenders fail to extend 65 per cent of their deposits as loans, a measure that was introduced to stimulate credit.

That and other penalties push the effective hit on capital to between 40 per cent and 50 per cent, Dissanayake said.

"The CRR is unique and hugely punitive" because the cash could've been put to better use than lying idle with the central bank.

The Chief Executive Officer, Nova Merchant Bank, Mr. Anya Duroha, expressed some sympathy for the central bank, which he said was "trying to solve all kinds of problems in the economy."

Fitch revised its outlook for Nigerian banks to negative toward the end of last year as the economy started slowing and the central bank ramped up intervention.

"Nigerian banks compared to other markets operate in a volatile environment," Dissanayake said.

"The banks have to deal with economic shocks, short credit cycles and persistent problems in the oil sector. They also have to deal with policy actions, policy uncertainty and regulatory risks."

There are some positives. Having about 21 major banks serve a population of about 200 million in a $450 billion economy gives lenders a solid market position, he said.

This strong revenue-generating capacity enables lenders to absorb the higher cost of risk even when income from interest charges on loans deteriorate.

The first half of the year saw banks book large trading and foreign-exchange reevaluation gains that shielded them from lower yields on government-bond holdings, slower loan growth and less client activity. But the fallout from the Covid-19 outbreak may show in the second half, weighing on 2020 earnings.

"On the revenue side, we forecast about a 20 per cent decline," Dissanayake said. "Profitability is going to decline, but the degree depends on the extent of loan-impairment charges recognised in the year and the size of trading and translation gains."

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