Nigeria’s banking sector is facing significant financial strain, potentially losing trillions of naira annually due to the Central Bank of Nigeria’s (CBN) stringent Cash Reserve Ratio (CRR) policy. A new report by investment banking and research firm Chapel Hill Denham highlights that the 50% CRR effectively immobilizes half of customer deposits without earning interest, creating a substantial drag on bank profitability and lending capacity.

The report, titled “The Nigerian Banking Paradox: High Returns, Deep Discounts,” argues that despite Nigerian banks posting some of the strongest returns on equity in Africa, they are undervalued compared to their South African and Moroccan counterparts. This undervaluation is attributed to macroeconomic uncertainties and restrictive regulatory environments.

Chapel Hill Denham’s analysis reveals that for every N100 in deposits, banks must hold N50 in non-interest-bearing reserves at the CBN, while still paying interest to depositors. With an estimated 15% net interest spread, this policy results in an annual earnings loss of approximately N2.5 trillion, which is about 60% of the gross earnings reported in Q3 2025.

The CRR policy, initially intended to manage liquidity, control inflation, and stabilize the naira, is now seen as a structural impediment to the banking sector's growth. The report suggests that this policy discourages lending and reduces the overall economic capacity of banks.

The analysts further noted that the CBN’s framework, a response to the 2008/2009 banking crisis and currency volatility, has seen its cost-benefit calculus shift. As Nigerian banks expand their regional presence, the current regulatory perimeter, including the CRR and mandatory consolidation of cross-border operations, suppresses reported returns and creates asymmetric upside potential.