What happens to your money after you deposit it in a bank? And how do decisions taken by the Central Bank of Nigeria (CBN) affect how much money banks can lend, how much businesses pay to borrow, and ultimately, the prices Nigerians pay for goods and services?
The answers reveal an important part of how the CBN manages the economy, and why decisions that may appear to concern only banks can have far-reaching consequences for ordinary Nigerians.
To understand this, we must first understand the relationship between the Central Bank and commercial banks.
Commercial banks play an important role in keeping the economy running. They receive deposits from individuals and businesses, facilitate payments, provide loans and finance economic activities. When a trader borrows money to stock a shop, a manufacturer secures financing to purchase machinery, or a family obtains a loan to build a home, commercial banks help make these activities possible.
But banks do not have unlimited freedom to use the money deposited with them. The CBN regulates how they operate, including how much of certain deposits they must keep in reserve and how much liquidity is available within the financial system.
Why does this matter?
Because the amount of money banks can deploy into the economy influences how easily businesses and individuals can borrow, how much they spend, and how quickly economic activity expands. These conditions can also affect inflation, which determines how much Nigerians can buy with the money they earn.
One of the instruments the CBN uses to manage the amount of money available within the banking system is what is called the Cash Reserve Requirement (CRR).
The name may sound technical, but the idea is straightforward.
When customers deposit money in a commercial bank, the bank is required to keep a certain proportion of qualifying deposits as reserves with the CBN. It cannot use that portion of the money for ordinary lending or investment activities.
At its September 2026 meeting, the CBN retained the CRR at 45 per cent for deposit money banks and 16 per cent for merchant banks, alongside a 75 per cent requirement for qualifying non-Treasury Single Account (non-TSA) public-sector deposits.
What does this mean?
Imagine a commercial bank receives N100 billion in deposits that are subject to the standard 45 per cent CRR. The bank would be required to maintain N45 billion as reserves with the CBN.
That leaves N55 billion before accounting for other regulatory requirements, liquidity needs and operational considerations. The bank cannot necessarily lend out all the remaining money, but the example illustrates how the CRR limits the funds available for lending and investment.
Now consider this across Nigeria’s banking industry, where banks collectively hold trillions of Naira in deposits.
A requirement to keep 45 per cent of qualifying deposits in reserve means a substantial amount of money is held back from ordinary lending activities.
The CBN can therefore influence the amount of money banks make available to the economy without having to decide individually which businesses or customers should receive loans.
Why Would the CBN Want Banks to Lend Less?
Ordinarily, more lending sounds like a good thing. Businesses need loans to expand, manufacturers need financing to purchase equipment, and entrepreneurs need capital to turn ideas into functioning businesses.
And indeed, lending is essential to economic growth.
But there is another side to the story.
When banks make more credit available, businesses and individuals can have more money to spend. This can increase demand for goods and services. If the economy is producing enough to meet that demand, increased spending can support production, investment and employment.
However, if demand grows faster than the supply of goods and services, prices can begin to rise.
Let me give a simple example.
Imagine a market where traders have 1,000 bags of rice available for sale. If more people suddenly have money to purchase rice, but the traders still have only 1,000 bags to sell, competition among buyers may push prices higher.
This is one way inflation can occur: more money is chasing a limited supply of goods.
Of course, inflation in Nigeria is influenced by several other factors, including food production, insecurity, transportation costs, energy prices and exchange-rate movements. But the amount of money available for borrowing and spending also plays an important role.
By requiring banks to keep a substantial portion of deposits in reserve, the CBN can restrain the expansion of credit and help moderate spending pressures in the economy.
The objective is to reduce the risk that excessive demand will continue to push prices upwards.
But What Happens to Businesses That Need Loans?
This is where monetary policy becomes a balancing act.
While restricting the amount of money available for lending can help manage inflation, it can also make it more difficult for businesses and individuals to access financing.
For instance, consider a furniture manufacturer in Aba who wants to purchase additional equipment to increase production. Or a rice distributor in Kano who needs a loan to purchase more stock. Or a small business owner in Lagos who wants to expand operations and employ five additional workers.
All three may depend on bank financing.
When banks have less liquidity available for lending, they may become more selective about the loans they approve. Borrowing costs may also remain high, depending on prevailing interest rates and other financial conditions.
For the manufacturer, this could mean postponing the purchase of equipment. For the rice distributor, it could mean buying less stock. For the small business owner, it could mean delaying expansion and recruitment.
These consequences can extend beyond the businesses themselves. Suppliers may receive fewer orders, workers may face fewer employment opportunities, and consumers may have fewer goods and services available.
This explains why the CBN is careful in how it manages the relationship between inflation and economic growth.
If too much money is available for spending without a corresponding increase in production, inflationary pressures can intensify. But if access to financing becomes too restrictive, businesses may struggle to expand the production needed to meet demand and support economic growth.
The challenge is to achieve price stability while maintaining financial conditions that support sustainable economic activity.
Beyond the Cash Reserve Requirement, the CBN also uses another instrument known as Open Market Operations (OMO). Again, the name sounds more complicated than the underlying idea.
Through Open Market Operations, the CBN buys or sells eligible financial securities to influence the amount of money available in the financial system. Think of it as a way of taking excess money out of circulation within the banking system or putting money back into it.
When the CBN wants to reduce excess liquidity, it can sell securities to eligible banks and investors. These institutions pay for the securities, and the payments absorb money that would otherwise remain available within the financial system.
For example, if the CBN sells N500 billion worth of securities and they are fully purchased, the transactions can withdraw N500 billion in liquidity from the financial system, subject to settlement arrangements and other monetary operations.
The institutions purchasing these securities receive financial assets that earn returns, while the CBN absorbs liquidity.
When the CBN wants to increase liquidity, it can do the opposite by purchasing eligible securities. The money paid for those securities enters the financial system, increasing the funds available to participating institutions.
This does not mean that every Naira injected into the banking system immediately becomes a loan to a business or individual. Banks must still consider creditworthiness, interest rates, regulatory requirements and the risks associated with lending. Nevertheless, Open Market Operations give the CBN another means of influencing monetary conditions.
The distinction between the two instruments is useful. The CRR determines how much of certain deposits banks must maintain as reserves, while Open Market Operations allow the CBN to absorb or inject liquidity through transactions in financial securities.
Both help the Central Bank manage the availability of money in the economy.
For most Nigerians, the importance of these policies is not in their technical names or the financial transactions through which they operate. It is in how they influence everyday economic decisions.
If you run a business, the amount of money available for lending can affect whether you secure financing to expand, how much interest you pay and whether taking a loan makes commercial sense.
If you are an employee, the availability of financing can influence your employer’s ability to invest, increase production and create new jobs.
If you are considering taking a loan to purchase a vehicle, finance your education or build a home, the conditions within the banking system can influence the cost and availability of that credit.
And even if you never take a bank loan, monetary policy can still affect you through inflation.
Consider a household that spends N100,000 every month on food, transportation and other essentials. If prices rise by 20 per cent, the same basket of goods and services would cost N120,000, assuming the household’s purchasing habits remain unchanged.
That is an additional N20,000 the household must find every month simply to maintain its previous standard of living. If income does not increase at the same pace, the family must either reduce spending, draw on savings or find additional sources of income.
This is why inflation matters so much to ordinary Nigerians. It gradually reduces the purchasing power of money, making it more difficult for households to plan and businesses to manage costs.
When the CBN uses instruments such as the CRR and Open Market Operations to manage liquidity, one of its objectives is to reduce inflationary pressures and support price stability.
The benefits may not be immediate. Monetary policy takes time to influence bank lending, spending decisions and prices. It also cannot independently resolve supply shortages, high transportation costs or other structural problems that contribute to inflation.
There is another important distinction. Bringing inflation down does not necessarily mean that prices will return to where they were. It generally means that prices are increasing more slowly.
For example, if inflation falls from 20 per cent to 10 per cent, goods and services may still be becoming more expensive, but at a slower rate than before. Over time, slower and more predictable price increases can make it easier for households to manage their budgets and for businesses to plan investments.
That is why the CBN’s decisions concerning banks matter even to Nigerians who have never applied for a loan or purchased a financial security. The amount of money banks can lend, the cost of credit, the ability of businesses to expand and the rate at which prices increase are all connected, even if the relationships are not always immediately visible.
Ultimately, the CBN’s management of bank reserves and financial-system liquidity is not simply about controlling money within the banking industry. It is about influencing the conditions under which the entire economy operates.
For the everyday Nigerian, the desired outcome is an economy where businesses can plan and invest, employment opportunities can grow, prices become more stable, and the money people earn retains more of its purchasing power.
Because what happens to money in the banking system does not end with the banks. Sooner or later, it reaches the markets where we shop, the businesses where we work, and the households where we make decisions about how to spend, save and plan for the future.
– John Olanipekun, an Economist who writes from Osun State
