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How CRR Raise Gives Fintech Firms Edge In Retail Lending

Governor of Central Bank of Nigeria (CBN), Mr. Godwin Emefiele

The Nigerian banking regulator’s attempt to curb rising inflation by raising the cash reserve ratio (CRR) could have serious implications for its efforts to increase access to credit and deepen financial inclusion. Also, banks may be forced to ease off on retail lending opening advantage for fintech startups.

At the first Monetary Policy Committee (MPC) meeting of the year held on 23rd and 24th January 2020, the CBN raised Cash Reserve Ratio (CRR) by 500bps to 27.5 percent from 22.5 percent.

The cash reserve ratio refers to the portion of total deposits lenders are expected to keep with the central bank. It serves as a monetary management tool used by the central bank to control the volume of money in circulation.

In curbing inflation, the CBN’s increase of CRR forces the banks to have less money for lending. In turn, banks would need to increase lending rates to maintain profit margins. With banks increasing interest rates, people would be forced to borrow less money. As the interest rate increases money supply reduces and demand goes down dragging inflation along with it.

“The Committee is confident that increasing the CRR at this time is fortuitous as it will help address monetary-induced inflation whilst retaining the benefits from the Bank’s LDR policy, which has been successful in significantly increasing credit to the private sector as well as pushing market interest rates downwards,” said Godwin Emefiele, governor, CBN during the MPC meeting with the press.

The only twist is that the CBN is counting on the deposit money banks (DMBs) to drive its more than 90 million Nigerians financially included by 2024. As part of achieving the target, the CBN has since 2019 mandated DMBs to maintain a 65 percent lending to deposit ratio (LDR) with the objective of forcing banks to lend money to small businesses thereby deepening financial inclusion.

The new decision, however, does not exactly make it easier for banks as increasing the CRR reduces the amount of money in banks which means less money to lend to small businesses.

But Azeez Lawal, an investment banker does not think the LDR will be affected much.

“Deposits of customers with banks are currently estimated to be over N16 trillion and growing, a 5% (500bps) increase in CRR will take less than a trillion naira from the system, as a result, we do not expect the increase in CRR to immediately impact the current status-quo,” Lawal said.

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The increase will no doubt affect the way banks approach financial inclusion. Facing reduced cash flow, banks are likely to tune up their drive for deposits from big-ticket customers to meet the new requirement.

Taiwo Obasan, CEO of Fundall told explained that the CRR is a ratio and if it is to be grown, there is a need to increase deposits.

“Here’s a good example, if I’m required to always keep 25 percent of all deposits if I collect N100 billion, that is N75 billion left with me to play with. However, if I decide to increase that to N200 billion, I’d be left with N150 billion to play with,” he told BusinessDay.

He added that the single number play will encourage banks to work towards increasing their deposits through induced deposit rate increase or expanding their collection net to include areas, people and demographics without proper banking.

In the long run, more banks are likely to opt for the latter because there is no incentive to increase deposit interest rates due to the current rate crash in treasury bills and bonds. This is partly why banks have become aggressive in offering salary-loans and wooing high networth individuals (HNI) and corporate organisations to take loans for their projects.

“There’s definitely going to be a bullish trend in reaching more people so they can be financially included and banks can collect their deposits however it is not very certain that these people will be able to access loans at a cheaper rate,” Obasan said.

Should the banks be forced to increase lending rates to maintain a profit margin, many small businesses could be discouraged from applying for loans leaving banks once more focusing on more worthy takers. With small businesses financially excluded, fintech companies have a good chance of leading the retail lending space.

Although fintech companies lend at double-digit rates which could be high for startups, Obasan suggests they could leverage technology to reduce operational expenses. While that would help drive down costs, it is doubtful whether the use of technology would make a significant difference. Even with a near hundred percent dependence on technology, some fintech companies still lend for up to 40 to 50 percent while most banks’ maximum lending rate is usually between 20 and 30 percent.

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The advantage for fintech is that due to the high demand the mass retail market usually borrows without taking much notice of rates.

“So it’s going to be a good ride for FinTechs hopefully Google and Government doesn’t catch-up,” Obasan said.