CBN latest policy to reduce money in circulation; banks to have less money to lend

As the Central Bank of Nigeria (CBN) drives banks to keep more money in its reserve, it is possible that the total money in circulation will be reduced. More, banks will have less fund to meet lending obligations to businesses.

The apex bank announced recently that it is increasing one of its monetary control tool, the Cash Reserve Ratio (CRR), from 22.5% to 27.5%. The CRR is a mandate given to banks to maintain stipulated percentage of deposit with the Central Bank, over a period.

The policy move shows a tightening of the system to ensure liquidity and forestall uncontrollable inflation. However, according to a senior research analyst at FXTM, Lukmon Otunuga, the move will put banks in a tight corner as less fund is available for them to push around.

He said, “The increase in CRR reduces the amount of money available for banks to lend, essentially pressuring liquidity with a goal of reducing inflation levels.”

As well the Chief Executive Officer of Financial Derivatives Co. Ltd, Bismarck Rewane, has highlighted some of the impact of the CRR increase. He underlined pressure on earnings, and a spike in inter-bank lending rate.

Although the overall impact of the monetary curb is still a debate among analysts. A point of concern is how businesses will fare if they can’t access fund. And will the pressured financial institutions not be forced to look at tweaking or hiking some selective interest rates they provide sectors of the economy?

To check the highlight of the economic outlook for 2020 in Nigeria, prepared by Bismarck Rewane, proceed to the slide below :