Nigerian economists are calling for improvements in how the Central Bank of Nigeria (CBN) manages liquidity in the banking system. They argue that current tools, including the cash reserve requirement (CRR), need clearer links to market rates and careful implementation. Ayo Teriba, CEO of Economic Associates, highlighted a long-standing gap between the Monetary Policy Rate (MPR) and actual market rates. This gap, he notes, affects the transmission of monetary policy decisions to the broader economy.
The CRR is a key monetary policy tool used by the CBN to control the amount of money in the banking system. It requires commercial banks to keep a percentage of customers' deposits as cash reserves with the CBN, rather than lending or investing them. As of September 2026, the CRR for Deposit Money Banks is 45%, while Merchant Banks have a CRR of 16%. Non-TSA public-sector deposits have a higher CRR of 75%. These rates were retained at the MPC meeting of 21–22 September 2026, even as the Monetary Policy Rate (MPR) was cut to 23%.
Teriba argues that the CRR should be re-examined, suggesting it could be set at zero percent, meaning banks would not be mandated to keep a percentage of customers' deposits with the CBN at no interest accruals to them. He emphasizes the need for reforms to be judged separately from outcomes and impact, focusing on liquidity segments, price stability, growth, welfare, and net reserves. Teriba also points out that discussions of the MPR and rates must include the related quantities of money, as these quantities help set prices.
Professor Uche Uwaleke agrees with much of Teriba's analysis, describing the CRR as a crude but useful tool in Nigeria's economy. He notes that normal policy channels work slowly in Nigeria, and banks hold large excess liquidity. Uwaleke suggests that high CRR can still affect money outside the banking system, as banks influence how much cash people hold. He adds that the CBN can best assess the effectiveness of CRR in controlling liquidity.
Another expert, Hashim, supports a lower CRR but rejects cutting it to zero. He warns that a sudden drop to zero could flood the system with cash, push interest rates down sharply, and encourage borrowing for consumption or political spending. Hashim advocates for finding the right balance: a CRR that supports credit creation and economic activity while preserving monetary and macroeconomic stability.
The experts agree that Nigeria's liquidity tools need better alignment with real market conditions. They call for clearer data on net reserves, proper measurement of rate gaps, and a balanced approach to the CRR. This, they argue, will ensure that policy supports growth without endangering hard-won stability. The CBN's recent decision to recalibrate the policy rate has been welcomed, with experts urging careful, gradual steps rather than one big move.
The discussions highlight the complexities of monetary policy management in Nigeria. The CBN's tools, including the MPR, CRR, liquidity ratio, and open market operations, must be carefully calibrated to achieve desired outcomes. As the experts emphasize, finding the right balance in monetary policy is crucial for supporting economic growth, stability, and welfare. The CBN will need to consider these perspectives as it continues to manage the nation's economy.
Key points
- Experts urge CBN to improve liquidity management with clearer links to market rates and careful use of CRR.
- CRR should be re-examined, with some experts suggesting a reduction or elimination of the requirement.
- Economists emphasize the need for a balanced approach to monetary policy, supporting growth while preserving stability.
