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Bullion

Keywords

Cash Reserve Ratio, Monetary Policy, Banking System Liquidity, Reserve Requirements

Abstract

In pursuit of price stability, the Central Bank of Nigeria (CBN) deploys a range of monetary policy instruments to regulate liquidity conditions and influence macroeconomic outcomes. Among these, the Cash Reserve Ratio (CRR) has played an increasingly prominent role in recent tightening cycles. While these measures aimed to curb excess liquidity and inflationary pressures, concerns have emerged regarding their implications for bank intermediation and financial stability. This study evaluates the impact of CRR on banking system liquidity and stability in Nigeria using an Autoregressive Distributed Lag (ARDL) model and monthly data from June 2010 to March 2025. The results confirm the effectiveness of the CRR as a liquidity management tool: on average, a 1.0 percentage point increase in the CRR reduces banking system liquidity by approximately 0.44 per cent, with stronger effects in the short run. On financial stability, the findings indicate that while higher CRR initially exerts pressure on bank capital, asset quality, and profitability, these effects diminish over time. The study concludes that although the CRR remains an effective instrument for liquidity control, its aggressive use entails trade-offs for banking sector performance. It recommends a cautious approach to further tightening in the near term to safeguard financial stability. To address persistent liquidity concerns more efficiently, the study also proposes a differentiated, non-remunerated CRR framework that includes foreign currency deposits, thereby strengthening liquidity sterilisation without disproportionately constraining domestic intermediation.

Author Bio

Dr Yaaba is Assistant Director and Head of the Monetary Analysis Office in the Research Department, CBN. He holds a PhD in Economics and has a robust academic and policy background in monetary economics, fiscal policy, international economics, and regional integration. A seasoned data scientist, he has presented at global platforms such as the World Statistical Congress and the World Economic Forum. He serves on editorial boards and is affiliated with several professional bodies, including the Nigerian Economic Society and the World Economics Association.

Dr Usenobong Akpan is a Deputy Manager in the Monetary Analysis Office of the Research Department at the Central Bank of Nigeria. He holds a PhD in International Economics and has extensive teaching, research, and policy experience in international economics, monetary economics, macroeconomic policy, financial sector analysis, fiscal policy, quantitative methods, and development economics. He has authored over 40 publications in reputable local and international journals and has contributed to several national policy initiatives through technical advisory roles. Dr Akpan is an active member of professional bodies, including the Nigerian Economic Society (NES).

Publication Title

Bullion

Issue

2

Volume

50

First Page

43

Last Page

58

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