Banks should use this additional liquidity to fund more businesses in order for them to employ more people
In February 2014, when the Central Bank of Nigeria (CBN) increased the cash reserve ratio (CRR) on public sector funds from 50 to 75 per cent, the move was hailed by many Nigerians as positive and progressive. The expectation was that such a hike would curb high inflation, which had been predicted for 2015. There was also an assumption that the hike would reduce easy money and force banks to become creative in both mobilising savings and increasing lending to the real sector.
More than a year after the policy was introduced and with the 2015 general election that put enormous pressure on the national currency done with, it can be argued that inflation has remained relatively stable. However, there is little evidence to show that the other expectations such as banks actively pursuing savings and increasing lending to the real sector were achieved. In fact, we can safely conclude that nothing has changed in that direction.
Apparently to address this challenge, the CBN recently revised the CRR on public sector deposits from 75 to 31 per cent, a reduction of almost 2,000 basis points below the January 2014 level of 50 per cent. Banks have welcomed the pronouncement which allows them to leverage 69 per cent of public sector deposits in their process of financial intermediation. But this leaves many wondering about the science of determining CRR and who stands to benefit from this policy revision.
Opinion is today polarised on the issue of CRR because banks do not appear to be doing enough to empower businesses. To that extent therefore, policies which they compete on how much to share with government officials for public sector placements and thereafter appear to equip banks to do less for the people and yet make more money are not welcomed. Banks spend little of their time on mobilising small savings and remain extremely reluctant to support small and medium businesses. Many of them engage in sharp practices that fuel corruption as, focus predominantly on lending to an identical small set of large corporate clientele without broadening access to financial services.
Some people had expected this downward revision in CRR on public sector deposits much sooner. This expectation was premised on the fact that the central bank governor was appointed from a banking institution which played actively in the public sector, and therefore was expected to pursue policies which favoured such banks, above the majority of the people. However, prevailing economic circumstances such as low oil prices, the depreciation of the naira and tightening financial circumstances have necessitated a combination of interventions that will together strengthen the economy.
The foregoing therefore provides a legitimate reason for the lowering of CRR on public sector funds to increase funding sources for banks for higher liquidity which should stimulate lending activities and consequently, economic growth. But the questions remain: to what extent should the CRR on public sector deposits be reduced? And can this margin be targeted at boosting lending in specific sectors?
Whilst the issue of change in CRR will continue to attract diverse opinions, we appeal to banks to use this additional liquidity to provide funding to more businesses in order for them to employ more people, increase productivity and output and positively contribute to socio-economic growth and development.
The masses must feel the positive effects of policy changes to appreciate them and defuse assumptions that officials pursue only policies that favour their immediate constituencies. In addition, the CBN must develop a framework that defines parameters for changing/establishing rates and also ensures that the public sector does not crowd out the private sector by borrowing at its expense or borrowing while maintaining deposits which earn lower rates.
