Nigeria’s banking sector may be losing an estimated N2.5 trillion annually in forgone earnings due to the Central Bank of Nigeria’s high Cash Reserve Ratio requirements, according to a report released by Chapel Hill Denham.
The report, titled “The Nigerian Banking Paradox: High Returns, Deep Discounts”, argued that despite Nigerian banks posting some of the strongest returns on equity across Africa, investors continue to value them at steep discounts relative to peers in countries such as South Africa and Morocco.
Chapel Hill Denham attributed part of the valuation gap to Nigeria’s macroeconomic environment and what it described as a restrictive regulatory framework, particularly the Central Bank’s CRR policy.
Under current regulations, banks are required to keep a significant portion of customer deposits with the Central Bank of Nigeria as non-interest-bearing reserves.
The analysts said the policy, originally designed to control liquidity, inflation and exchange rate pressures, has evolved into a structural drag on banking sector profitability and lending capacity.
“Our analysis reveals that Nigerian banks operate under a uniquely restrictive regulatory perimeter, including a 50 percent cash reserve ratio and mandatory consolidation of all cross-border operations, that structurally suppresses current reported returns,” the report stated.
According to the firm, banks are effectively compelled to immobilise half of customer deposits at the central bank without earning returns on those funds while still paying depositors interest rates ranging between five and 12 percent.
“For every N100 of deposits, banks must immobilise N50 in non-interest-bearing reserves at the CBN while still paying depositors,” the report said.
Applying an estimated 15 percent net interest spread, Chapel Hill Denham calculated that the banking industry faces an annual earnings drag of about N2.5 trillion, equivalent to roughly 60 percent of sector gross earnings recorded in the third quarter of 2025.
The report added that the opportunity cost associated with the CRR regime is weakening banks’ capacity to expand credit to businesses and households, thereby constraining broader economic activity.
The analysts compared Nigeria’s reserve requirement with those of other African economies and inflation-targeting jurisdictions globally, describing the CBN’s framework as unusually aggressive.
According to the report, South Africa operates with a CRR of 2.5 percent, Kenya with 4.25 percent, Ghana with 15 percent and Egypt with 16 percent, while Morocco has reduced its reserve requirement to zero percent. The report said the global median among inflation-targeting central banks ranges between five and 10 percent.
“The Central Bank of Nigeria’s 50 percent cash reserve requirement sits well above the global norm, fundamentally reshaping bank balance sheets and earnings,” the report noted.
Chapel Hill Denham argued that a gradual reduction of the CRR toward 30 to 40 percent over the next two to three years could become economically feasible if macroeconomic conditions improve.
The firm estimated that reducing the CRR from 50 percent to 30 percent could release approximately N8 trillion into the banking system and potentially generate about N800 billion in additional annual pre-tax profit for lenders.
The report also suggested that current market pricing indicates investors believe the existing CRR structure may remain in place for an extended period despite the possibility of future easing.
The findings come months after the Monetary Policy Committee of the Central Bank retained existing reserve requirements at its February 2026 meeting.
At the meeting, the MPC maintained the CRR for deposit money banks at 45 percent, merchant banks at 16 percent and 75 percent for non-TSA public sector deposits as part of broader measures aimed at preserving tight monetary conditions.
Members of the committee defended the policy stance, citing persistent inflationary pressures, excess liquidity and exchange rate risks.
MPC member Aku Pauline Odinkemelu said tight prudential ratios such as the CRR should be retained to preserve macrofinancial stability and anchor system liquidity.
Another member, Bala Moh’d Bello, said maintaining the CRR and asymmetric corridor parameters would help sustain prudent monetary conditions while supporting private sector activity.
Bandele A.G. Amoo stated that elevated reserve requirements on public sector deposits had helped sterilise excess liquidity arising from fiscal injections, while Lamido Abubakar Yuguda said retaining existing liquidity controls reflected the committee’s commitment to maintaining tight monetary conditions.
The Central Bank has consistently defended elevated reserve requirements as necessary tools for managing inflation, supporting naira stability, and containing systemic liquidity risks. Even as analysts continue to debate their long-term impact on the banking sector’s growth, profitability, and credit expansion, the Central Bank has maintained its stance.