Nigeria’s banking sector may be losing about N2.5 trillion annually in earnings due to the Central Bank of Nigeria’s high Cash Reserve Ratio (CRR), according to a new report by investment banking and research firm Chapel Hill Denham.
In its report titled “The Nigerian Banking Paradox: High Returns, Deep Discounts,” Chapel Hill Denham said Nigerian banks continue to post some of the strongest returns on equity in Africa yet remain undervalued relative to their peers due to regulatory constraints and macroeconomic risks.
The firm identified the Central Bank’s CRR policy as one of the biggest drags on banking sector earnings, arguing that the requirement forces banks to keep a large portion of customer deposits with the apex bank without earning returns, while continuing to pay interest to depositors.
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According to the analysts, for every N100 deposited by customers, banks are required to set aside as much as N50 in non-interest-bearing reserves, creating a substantial earnings drag across the industry.
“Applying a 15 percent net interest spread implies an annual earnings drag of approximately N2.5 trillion, equivalent to roughly 60 percent of Q3 2025 gross earnings,” the report stated.
The CRR is a monetary policy tool used by central banks to control liquidity in the financial system by requiring commercial banks to hold a percentage of deposits as reserves. In Nigeria, the policy has been maintained at elevated levels as part of broader efforts to contain inflation, stabilise the naira, and manage excess liquidity.
However, Chapel Hill Denham argued that while the policy may have served a prudential purpose following the 2008–2009 banking crisis and periods of exchange rate instability, its long-term cost to the financial system may now be outweighing its benefits.
“Our analysis reveals that Nigerian banks operate under a uniquely restrictive regulatory perimeter,” the report said. “The framework suppresses current reported returns while creating asymmetric upside potential if conditions improve.”
The firm stated that the high reserve requirement has weakened banks’ ability to expand lending to businesses and households, thereby limiting credit creation and broader economic activity.
It also noted that Nigeria’s CRR remains significantly above levels seen in comparable African economies.
According to the report, South Africa operates a CRR of 2.5 percent, Kenya 4.25 percent, Ghana 15 percent, Egypt 16 percent, while Morocco has reduced its reserve ratio to zero.
“The Central Bank of Nigeria’s reserve requirement sits well above the global norm, fundamentally reshaping bank balance sheets and earnings,” the analysts said.
Chapel Hill Denham projected that a reduction in CRR from 50 percent to 30 percent could release approximately N8 trillion into the banking system and boost annual pre-tax profits by about N800 billion.
The report added that investors currently appear to price Nigerian bank stocks on the assumption that the restrictive reserve regime will remain unchanged for the foreseeable future, contributing to discounted market valuations.
Despite the concerns raised by analysts, the Central Bank has maintained that elevated reserve requirements remain necessary to preserve macroeconomic stability.
At its February 2026 Monetary Policy Committee meeting, the CBN retained 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 efforts to maintain tight monetary conditions.
Members of the committee defended the stance, citing inflationary risks, exchange rate pressures, and the need to keep system liquidity under control.
MPC member Aku Pauline Odinkemelu said retaining tight prudential measures was necessary “to keep system liquidity well anchored,” while Bala Moh’d Bello said the stance would help maintain stable monetary conditions while supporting private sector activity.
Bandele A.G. Amoo also defended the policy, arguing that excess liquidity from fiscal injections could undermine disinflation efforts and exchange rate stability if not sterilised.
The debate over the CRR reflects a broader policy dilemma for the CBN: balancing inflation control and currency stability against the need to improve credit access and support economic growth.