A new report by investment banking and research firm Chapel Hill Denham has raised concerns that Nigeria’s banking sector could be losing trillions of naira annually due to the Central Bank of Nigeria’s stringent cash reserve requirements.
The report, titled “The Nigerian Banking Paradox: High Returns, Deep Discounts,” argues that despite Nigerian lenders posting some of the strongest returns on equity across Africa, they continue to trade at significantly lower valuations than peers in South Africa and Morocco. According to the firm, this disconnect is driven largely by macroeconomic uncertainty and tight regulatory conditions.
At the centre of its argument is the Central Bank of Nigeria’s cash reserve ratio (CRR), currently set at 50% for deposit money banks, a policy that requires banks to hold a large portion of customer deposits with the regulator without earning interest.
“For every N100, N50 is immobilised”
The report describes the framework as highly restrictive, arguing that it severely limits banks’ ability to deploy deposits for lending and investment.
“For every N100 of deposits, banks must immobilise N50 in non-interest-bearing reserves at the CBN, while still paying 5–12% to depositors,” the analysts noted.
It added that this structure creates a significant earnings drag across the sector, estimating that the opportunity cost of the policy amounts to about N2.5 trillion annually—roughly 60% of projected gross earnings.
“The CBN’s framework, designed in direct response to the 2008/2009 banking crisis and subsequent currency volatility, reflects rational macro-prudential choices, but the cost-benefit calculus has shifted materially as Nigerian banks have taken on a wider regional role,” the report stated.
CRR seen as global outlier
The analysis also argues that Nigeria’s reserve requirement is unusually high compared to global and regional peers, describing it as a structural constraint on balance sheet efficiency.
“The Central Bank of Nigeria’s 50% cash reserve requirement sits well above the global norm, fundamentally reshaping bank balance sheets and earnings,” the report said.
It compared Nigeria’s policy with other countries, noting that South Africa operates at 2.5%, Kenya at 4.25%, Ghana at 15%, and Egypt at 16%, while Morocco has reduced its CRR to 0%. It added that the global median for inflation-targeting economies is between 5% and 10%.
According to the report, such disparities place Nigeria in a “category of its own” in terms of liquidity restriction.
Potential upside if policy is relaxed
The report suggested that a gradual reduction in CRR levels could unlock significant liquidity for the financial system. It projected that lowering the ratio from 50% to 30% could release approximately N8 trillion into the banking sector and generate about N800 billion in additional annual pre-tax profits.
It also argued that current market valuations appear to assume that the restrictive policy will remain in place indefinitely, despite potential room for future policy easing.
CBN’s stance: tight liquidity still necessary
However, the Central Bank of Nigeria has maintained that high reserve requirements remain a critical tool for managing inflation, controlling excess liquidity, and stabilising the naira.
At the February 2026 Monetary Policy Committee meeting, the CBN retained key liquidity measures, including CRR levels of 45% for deposit money banks, 16% for merchant banks, and 75% for non-TSA public sector deposits.
Some MPC members defended the stance, arguing that tightening liquidity conditions helps preserve macroeconomic stability and prevent inflationary pressures from worsening.
“To preserve macrofinancial stability, tight prudential ratios such as CRR should be retained to keep system liquidity well anchored,” one member noted.
Another added that maintaining current parameters ensures that policy continues to support both price stability and private sector activity.
The ongoing debate
While the CBN insists that high CRR levels are necessary to anchor inflation expectations and manage liquidity risks, analysts argue that the policy may be constraining credit growth and limiting the banking sector’s contribution to economic expansion.
The debate now centres on whether Nigeria’s tight monetary framework remains appropriate in a high-inflation environment or whether it is beginning to impose heavier long-term costs on financial intermediation and growth.