reserve ratio
Reserve Ratio is the slice of customer deposits a bank must keep locked away with the Central Bank instead of lending out, as a safety cushion.
In plain English
Remember the days of the thrift collector, the woman who came round every morning to collect a small sum from market women, and everybody knew she never spent all of it at once, she kept some aside so that when someone needed a payout, the money was there.
Banks work on a similar promise, except at a much bigger scale, and the person making sure they keep enough aside is the Central Bank of Nigeria, not a thrift collector with a notebook.
When you deposit ₦100,000 into your account, your bank does not lock it in a drawer with your name on it. It lends most of it out to someone building a shop in Aba or someone paying school fees, and it earns interest on that loan.
The reserve ratio is the rule that stops a bank from lending out everything. It is the percentage of total deposits that the bank must keep with the Central Bank and cannot touch, no matter how tempting the lending opportunity looks.
If the Central Bank sets the ratio at 27.5 percent, a bank holding ₦10 billion in deposits must keep ₦2.75 billion untouched, and can only work with the remaining ₦7.25 billion.
This is also one of the levers the Central Bank pulls to control how much money moves around the economy. Raise the ratio, and banks have less to lend, which can cool down inflation. Lower it, and banks can lend more freely, which can warm up spending and borrowing.
A bank has ₦50 billion in customer deposits. The Central Bank sets the reserve ratio at 30 percent. That means ₦15 billion must sit untouched with the Central Bank, and the bank can only lend out or invest the remaining ₦35 billion.
Questions people ask
Does the reserve ratio affect how much interest I earn on my savings?
Indirectly, yes. When the ratio is high, banks have less money to lend, so they may offer less attractive rates on loans and sometimes on savings too, since their room to make money from lending shrinks.
Can a bank refuse to give me my money because of the reserve ratio?
No. The reserve ratio is about the bank's overall deposits held with the Central Bank, not about your specific account. Your withdrawals come from the bank's everyday operating funds, and healthy banks are required to always have enough on hand for customers.
Why does the Central Bank change the reserve ratio sometimes?
It is one of the tools used to manage inflation and the amount of money circulating in the economy. Raising it tightens lending, lowering it loosens lending, and the Central Bank adjusts it depending on what the economy needs at the time.
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