A new report by Chapel Hill Denham has revealed that Nigeria’s banking sector may be losing as much as N2.5 trillion annually due to the stringent Cash Reserve Ratio (CRR) policy of the Central Bank of Nigeria.
The report, titled The Nigerian Banking Paradox: High Returns, Deep Discounts, said that despite Nigerian banks recording some of the strongest returns on equity across Africa, they continue to trade below the valuation levels of peers in countries such as South Africa and Morocco due to persistent macroeconomic risks and regulatory constraints.
According to the investment firm, one of the most significant drags on profitability is the CBN’s elevated CRR requirement, which compels banks to keep a substantial portion of customer deposits in reserve without earning interest on those funds.
The report described Nigeria’s regulatory environment as unusually restrictive, noting that the CRR policy has significantly constrained banks’ liquidity and lending capacity.
It explained that for every N100 deposited by customers, banks are required to set aside N50 as non-interest-bearing reserves with the central bank while still paying depositors interest rates ranging between 5 and 12 per cent.
Analysts at Chapel Hill Denham estimated that applying a 15 per cent net interest spread to the sterilised funds translates to an annual earnings loss of approximately N2.5 trillion for the industry — a figure equivalent to nearly 60 per cent of the sector’s gross earnings in the third quarter of 2025.
The report noted that while the CRR framework was originally introduced as a macro-prudential tool following the 2008–2009 banking crisis and subsequent currency volatility, the long-term economic cost may now outweigh its benefits as Nigerian banks expand their regional footprint.
The research also highlighted that Nigeria’s reserve requirement is significantly higher than those of several African economies and inflation-targeting countries worldwide.
While Nigeria’s CRR currently stands at 50 per cent according to the report’s benchmark analysis, countries such as South Africa maintain 2.5 per cent, Kenya 4.25 per cent, Ghana 15 per cent, and Morocco zero per cent. The global average among inflation-targeting central banks is estimated at between 5 and 10 per cent.
Chapel Hill Denham argued that this makes Nigeria’s policy an outlier and creates what it described as an unusually asymmetric risk profile for lenders.
The analysts suggested that a gradual reduction of the CRR to between 30 and 40 per cent over the next two to three years is economically feasible if macroeconomic conditions improve.
According to the report, reducing the CRR from 50 per cent to 30 per cent could release roughly N8 trillion back into the banking system, boosting liquidity and potentially generating about N800 billion in additional annual pre-tax profits for banks.
The report added that current market valuations imply investors are pricing Nigerian lenders as though the existing CRR regime will remain unchanged indefinitely, despite the possibility of future policy easing.
At its February 2026 Monetary Policy Committee meeting, the Central Bank retained the CRR for deposit money banks at 45 per cent, while merchant banks remained at 16 per cent and non-TSA public sector deposits at 75 per cent.
Members of the MPC defended the decision, arguing that tight reserve requirements remain necessary to manage excess liquidity, curb inflationary pressures and support exchange rate stability.
Several committee members stressed that maintaining elevated prudential ratios is critical to anchoring monetary conditions and ensuring that liquidity is directed toward productive private-sector lending rather than passive placements.
Despite ongoing criticism from analysts and market participants, the CBN has consistently maintained that high CRR levels are essential to preserving macroeconomic stability, especially amid inflation concerns and exchange rate volatility.
