The International Monetary Fund (IMF) has called for reforms in Nigeria’s banking sector, warning that structural imbalances are weakening the effectiveness of monetary policy and limiting the impact of any future interest rate cuts.
In its June 2026 report, Nigeria: Selected Issues, the IMF noted that commercial banks respond quickly to increases in the Central Bank of Nigeria’s (CBN) Monetary Policy Rate (MPR) by raising lending rates, but are much slower to reduce borrowing costs when monetary conditions ease.
The Fund described the trend as a “rockets-and-feathers” phenomenon, where lending rates rise rapidly during policy tightening but fall only gradually when rates are lowered. According to the report, a 100-basis-point increase in the MPR typically leads to an immediate rise of between 175 and 180 basis points in Treasury bill yields and commercial lending rates. However, a similar rate cut results in lending rates declining by only 25 to 30 basis points.
The IMF said this asymmetry undermines the transmission of monetary policy and could delay relief for businesses, households, manufacturers, and investors even if the CBN begins easing rates in the future.
The report also highlighted the limited responsiveness of deposit rates, noting that savings rates have remained largely between three and seven percent despite the sharp increase in policy rates over recent years. This, according to the IMF, reflects weak competition for retail deposits and allows banks to maintain wider interest margins.
While acknowledging progress made through Nigeria’s foreign exchange market reforms and exchange-rate unification since 2023, the IMF said distortions within the banking system continue to hinder the full effectiveness of monetary policy.
The Fund urged the CBN to strengthen its operational framework and review the country’s high Cash Reserve Ratio (CRR), currently set at 45 percent for deposit money banks. It argued that a gradual reduction in reserve requirements, alongside moderating inflation and improved confidence in the naira, could enhance credit availability and improve monetary policy transmission.
The IMF further noted that exchange-rate movements now have a stronger influence on domestic inflation following foreign exchange reforms, making prices more sensitive to both global economic shocks and domestic policy decisions.
