MPR. CRR. BLR. What are these terms?

Over the past few months, the prices of goods and services have been climbing so high, they're practically giving everyone headaches. It's a tough pill to swallow for everyone in Nigeria, from the person pricing tomatoes to big businesses budgeting for the next quarter. 

The Central Bank of Nigeria (CBN) has decided to step into the ring to save us all, by tweaking the monetary policy rate. This article looks to break things down, but let’s have the raw facts. 

• The CBN has increased the MPR by 400 basis points from 18.75% to a record high of 22.75%. 

• The cash reserve ratio (CRR) has increased from 32.5% to 45%

• The bank liquidity ratio remains at 30%

• The asymmetric corridor is at +200/-700 basis points of the MPR. 

This is a lot, but there’s good news. We talked with Bayo, our Chief Financial Officer, who broke things down for us, so we can do the same for you. 

First, let’s break it down…

We know you’re not 5. But that doesn’t mean the terms might be less confusing. To understand what these recent policy adjustments mean, there are a few terms you need to get. Let’s break down what these big finance terms mean:

1. Monetary Policy Rate (MPR):

• What it is: The MPR is the benchmark interest rate set by the CBN, which influences the cost of borrowing in the country. The increase of 400 basis points just means the interest rate increased by 4% (why didn’t they just say so, right? I know). 

• What this means for you: It means that the lowest you can get charged for interest is higher now. With the previous MPR, banks charged between 25% - 30% interest. Now, it could get as high as 35%.

That sounds scary, yes. But it can be a good thing. A higher MPR also means that banks can give you higher interest rates on your savings. It could move from the typical 10% to 15%. Sweet.

2. Cash Reserve Ratio (CRR):

• What it is: The CRR is the percentage of a bank's deposits that must be kept with the CBN as a reserve. At an MPR of 45%, for every 100 naira a customer keeps with a bank, the bank must keep 45 naira with the CBN. This money cannot be used for lending or any other purposes.

• What this means for you: With the CRR increased to 45%, banks have less money to lend. While it becomes more difficult for businesses and individuals to get loans to do anything, it also means less cash in circulation, which is good for tackling inflation.
  

3. Bank Liquidity Ratio:

• What it is: This is simply the amount of money or assets a bank must hold compared to its total deposits. This can be either cash in the bank or assets like government bonds that can be quickly converted to cash if needed. The purpose is to ensure banks can promptly meet customers' withdrawal demands. 

• What this means for you: Maintaining the liquidity ratio at 30% ensures that banks remain stable and can cover withdrawals by customers. This means that your deposits are safer, but conversely affects how much banks can lend to you.

4. The Asymmetric Corridor:

• What it is: This is the rate at which the CBN either lends to or borrows from banks, with the MPR rate of 22.75% as a starting point. If the bank has excess cash and decides to lend to the CBN, the apex bank says it will borrow at MPR - 700 basis points (15.75%). If the bank needs cash urgently, the CBN then lends at MPR + 200 (24.75%)

• What this means for you: This adjustment gives the CBN more control over interest rates and discourages banks from borrowing money from or lending to the CBN.

Why's the CBN doing this? The big picture.

So, disclaimer: we’re not the CBN. But since World War II, global central banks have used Monetary Policies or something related to regulate inflation. Now, why has the CBN implemented these specific changes?

Reduced inflation

The primary aim of raising the MPR is to curb inflation by slowing down money circulation. Higher borrowing costs mean businesses and consumers will likely borrow less and spend less.

Nigeria’s inflation rate as of December 2023 was 28.92% and goods and services have become super expensive. With the higher MPR, a bottled water business, for example, might initially raise prices to cover the higher costs of repaying their loans. Then, the overall demand for that bottled water is expected to decrease as consumers become more cautious about spending. 

This reduced demand could decrease inflation over time, as businesses may be forced to lower prices to encourage customers to buy stuff. Since 2022, over 45 countries have increased interest rates to fight inflation.

Increased control over money in supply

Increasing the CRR helps control the money supply more directly. With banks required to keep a larger portion of their deposits at the CBN, there's less money available for lending, aiming to temper inflation and stabilise the flow of the naira.

Interestingly, some banks already operate at higher than 45% reserve, and others operate lower than the previous 30%. The CBN is now trying to harmonise everything to 45%. 

Adjusting the Asymmetric Corridor

The asymmetric corridor discourages banks from lending to the CBN and pushes them to lend to other businesses or invest in intrustments that would be profitable for them. 

Better days ahead?

We wish we could see the future, but our time machine is still in R&D. However, it’s not difficult to see how these changes by the CBN, are intended to move Nigeria off the inflationary pathway. We hope you found this breakdown helpful. If you’d like to learn more about banking, finance and technology, visit our blog to read more.