CBN retains lending rate, raises banks’ cash reserve ratio

Central Bank of Nigeria (CBN)
Central Bank of Nigeria (CBN)

The first meeting of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) in 2020 on Friday resolved to leave all but one monetary policy parameter unchanged.

At the end of the rescheduled meeting at the CBN headquarter in Abuja, the MPC opted to retain lending rate, also called monetary policy rate (MPR) at 13.5 per cent, with asymmetric corridor at +200/-500 basis points around the MPR. The liquidity ratio was left at 30 per cent.

The CBN governor, Godwin Emefiele, who presented the communique of the two-day meeting to journalists, said the committee decided to review upwards the cash reserve ratio (CRR) to 27.5 per cent, from 22.5 per cent.

The CRR is the quantum of cash or total deposit of the customers, which commercial banks hold as reserves either in cash or as deposits with the central bank for lending to customers.

READ ALSO: CBN mandates banks to give out more loans

In line with its policy to encourage the banks to make more money from their deposits available for lending to customers, particularly micro, small and medium enterprises (MSMEs), the CBN has reviewed the applicable loans-to-deposit rate (LDR).

Last year, the CBN had reviewed the banks’ LDR twice initially, from about 55 to 60 per cent, and later to 65 per cent.

In justifying the policy review, the CBN said increasing the minimum LDR of commercial banks was aimed at compelling banks to boost their credit capacity, mainly to agricultural entrepreneurs and farmers, small-and-medium-size businesses and consumers.

The LDR, expressed as a percentage, is used to assess a bank’s liquidity by comparing a bank’s total loans to its total deposits for the same period.

If the ratio is too high, it means that the bank may not have enough liquidity to cover any unforeseen fund requirements.

Conversely, if the ratio is too low, the bank may not be earning as much as it could be earning.


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