Monetary policies: Cash Reserve Ratio explained in lay terms

Previously, we discussed Open Market Operations and Liquidity ratio as Monetary policy tools, the CRR Cash Reserve Ratio is another tool for controlling the circulation of money in the Nigerian economy.

When banks collect deposits of money from their customers, they are not allowed to keep all the money with them at the bank; they are required by law to deposit a percentage of all the deposits they have collected with the CBN. The reason for this is so that if in any case, the bank folds up, they will not lose all customers funds. This in turn reduces the amount of money the commercial banks have to circulate and give to customers.

In Nigeria, after the monetary policy meeting, cash reserve ratio was increased from the former 20% to 22.5%. What this means is that the banks are meant to deposit 22.5% of all the money they have collected from their customers with the central bank at any particular point in time. For instance, if First Bank branches all over Nigeria have collected a total of 20 million naira in the bank accounts of their customers, they are required to deposit 22.5% of the 20 million naira which is about 4.5 million with the central bank of Nigeria. If they get more customers and may be the deposits increases to 25 million naira they will have to increase their deposit with the CBN to 5.625 million. Also if their deposit reduces to say 15 million then they will have to go and collect some money from the CBN to reduce their CBN reserve to 3.375 million, the Cash reserve ratio must be maintained at all times.

If the CRR is high, it is a CONTRACTIONARY POLICY because banks will have less money to give out and less money will circulate. But if the CRR is reduced, banks will have more money to circulate to customers which is EXPANSIONARY POLICY.

From the figures given by the CBN for this year 2016 which 22.5% from the 20% in 2015, it is clear that the CRR has been increased showing that the CBN is pursuing a CONTRACTIONARY POLICY for the year. 

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