Commercial banks in Nigeria are expected to face a significant drain on their cheap funding sources following a decisive move by the Central Bank of Nigeria (CBN). The apex bank has introduced a punitive 75 per cent Cash Reserve Ratio (CRR) on specific non-Treasury Single Account (TSA) government deposits, a measure designed to curb liquidity and safeguard the Naira.
The new rule targets funds held by banks from Ministries, Departments, and Agencies (MDAs) that have not been swept into the TSA, particularly substantial monthly allocations made to state and local governments from the Federation Account Allocation Committee (FAAC). Historically, these deposits have provided a large and cost-effective pool of capital for commercial lenders.
By sterilising three-quarters of these balances, the CBN is effectively forcing a deposit squeeze on the banking sector. Analysts at Afrinvest West Africa noted that the policy aims to deter banks that have become over-reliant on government funds to drive their profitability.
The move is primarily a liquidity sterilisation tool. According to anecdotal evidence cited by analysts, periods of Naira depreciation have often coincided with the disbursement of FAAC funds into the banking system. By restricting access to these balances, the CBN is tackling a potential source of exchange rate volatility, maintaining a careful balance between supporting economic growth and preserving stability in the foreign exchange market.
For banks, the immediate consequence will be increased pressure on profit margins, especially for those with high exposure to government deposits. They will now be compelled to intensify efforts to mobilise cheaper capital from the private sector to compensate for the loss of government funding.
Despite the liquidity constraints, the CBN Governor, Olayemi Cardoso, noted the continued resilience of the banking system during a recent Monetary Policy Committee meeting. The Committee also acknowledged significant progress in the ongoing bank recapitalisation programme, with 14 banks reportedly having fully met the new capital requirements. While the policy signals a modest easing bias for the wider economy, the restrictive CRR on government funds ensures that price and currency stability remain the central focus.
