Monetary Policy Rate (MPR), Cash Reserve Ratio (CRR) and Liquidity Ratio.

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These are terms you will come across a lot in the business section of our newspapers. And the journalists who are kind enough to share with us what is happening to these ratios do not bother to spare some time to explain what they really mean and why we should care about them.


image: premiumtimesng.com

Today, I intend to share with you what they mean and why they matter.

Monetary Policy Rate
This is just a fancy word for the interest rate at which banks can borrow from the central bank. And it is how the CBN influences the rate at which banks can lend to companies and customers. The higher the rate the less favourable terms you will get for loans from banks. 
Currently, in Nigeria, it is 12%. In 2011, it was 8% and has steadily risen since then to 13% towards the end of last year, then briefly dropped to 11% and for a while now has been 12%. 
So when next you come across this term in the news, you now have a fairly good fundamental knowledge of what it is about and how it potentially impacts the economy. Lower is better, usually (for economic expansion).

Cash Reserve Ratio (CRR)
If you've got a banker friend, whenever he wants to make you feel less educated, he throws around this term. CRR. You'll be amazed by how simple a situation it describes. It is simply the ratio of customer deposits the bank should hold as cash (or safe keep with the CBN) and not loan out. It is usually to prevent banks from being too aggressive with their loan issuing. So when this rate goes up banks tighten the loan tap. And currently it is at 22.50%. Banks must hold in reserve N22.50 out of your every N100 deposit.

Liquidity Ratio
This one is less thrown around in discussions like the other two. And it is more of a general financial analysis term, not only a bank ratio. However, when the figure comes from the Monetary Policy Committee of CBN, then it is specifically for banks. And it means the amount of highly liquid assets (cash and near cash assets) the banks have to meet their financial obligations (most importantly, customer withdrawals). Currently, it is set at 30% in Nigeria. Like the CRR, it influences the amount of money the bank can do aggressive business with.

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