The Central Bank of Nigeria’s (CBN) decision to cut the Monetary Policy Rate (MPR) to 27.0% the first reduction in five years is meant to nudge growth as inflation cools. But ratings agency Moody’s warns the move will “weigh on domestic banks’ profitability,” squeezing net interest margins (NIMs) that have been a key earnings driver for Nigerian lenders. This feature unpacks why Moody’s is concerned, how banks might respond, and what the cut means for borrowers, depositors and the wider economy.
At its September Monetary Policy Committee, the CBN reduced the MPR by 50 basis points to 27.0% and tightened several operating parameters: it narrowed the standing facilities corridor, reduced the Cash Reserve Requirement (CRR) for commercial banks from 50% to 45%, kept the liquidity ratio at 30%, and introduced a 75% CRR on public sector deposits held outside the Treasury Single Account. The move followed five consecutive months of moderating inflation, which was about 20.1% in August 2025.
Moody’s summary view is candid: the policy loosening will support growth but will “modestly compress Nigerian banks’ net interest margins,” because asset yields (rates banks earn on loans and securities) typically fall faster than deposit funding costs adjust downward.
Nigerian banks’ income mix remains heavily dependent on net interest income Moody’s notes that net interest income accounted for a large share of operating income for banks in recent years. When the policy rate falls:
Yields on new and re-priced loans and government securities are likely to decline quickly.
But deposit rates especially retail current accounts and a large stock of low-cost, non-interest-bearing deposits tend to be stickier and slower to fall.
That gap narrows NIMs: the difference between what banks earn on assets and pay on liabilities. Moody’s says this asymmetry will “outpace the related decrease in the cost of deposits” and therefore depress net interest income.
During the tightening cycle of 2022–2024 banks saw NIMs expand as asset yields rose; Moody’s warns the reverse dynamic now works against them.
The cut to CRR is significant. By freeing a portion of deposits previously held idle at the CBN, banks gain liquidity that can be redeployed into loans or higher-yielding securities a partial counterweight to margin compression. Moody’s notes this could “contribute to income generation,” but stressed the effect will vary by bank depending on deposit mix and ability to lend effectively.
Market reaction has already shown greater system liquidity: Nigeria’s overnight lending rates fell and banking system liquidity rose after the MPC, with some reports citing a surge in market liquidity (roughly ₦1–1.5 trillion) that eased money-market pressures. That extra liquidity may support short-term lending growth if creditworthy demand materialises.
Moody’s highlights that banks with a high proportion of low-cost deposits and those more reliant on interest margins will be most vulnerable. Smaller lenders with limited fee-income franchises and lower diversification into non-interest revenue (fees, commissions, trading income) face a tougher adjustment than larger banks with more diversified earnings.
Other pressures remain: the banking industry is exiting pandemic-era and policy forbearance measures, single-obligor limits and credit concentration risks are being enforced more strictly, and cost of risk could rise if economic loosening fails to translate into better borrower performance. Moody’s sees these structural issues as compounding margin risks.
Banks will likely pursue a mix of strategies:
Reprice assets selectively. While benchmark-linked corporate loans may be repriced faster, retail loan pricing often remains sticky. Lenders will target sectors where risk-adjusted returns justify higher spreads.
Protect deposit margins. Some banks may incentivise lower-cost current-account balances or promote stickier liabilities. Others may offer targeted term deposits to manage funding costs.
Push non-interest income. Increasing fees, bancassurance, digital payment revenue, and FX-related services will be an area of focus to offset interest compression.
Cost efficiency and digitalisation. Banks that lower operating costs per customer through technology will better preserve profitability.
Deploy freed CRR liquidity. Rapid, prudent deployment into productive credit or high-yield securities can mitigate the near-term profit squeeze but only if credit demand is robust and credit risk manageable.
For borrowers, a lower MPR should eventually translate into cheaper credit a boon for SMEs and consumers if banks pass through cuts. For savers, especially depositors relying on fixed-income products, returns may fall more slowly; commercial banks often maintain higher deposit rates for competition but may not match the pace of asset yield declines.
The CBN’s move is a policy trade-off: stimulate growth and credit with lower rates while risking a temporary hit to bank profits. Analysts note that if rate cuts spur real economic recovery clearer demand, lower defaults, and broader financial activity banks can regain profitability through volumes and improved asset quality. Moody’s concession: the loosening could indirectly benefit banks if it strengthens growth, credit demand and borrower quality but that is neither immediate nor guaranteed.
Moody’s itself upgraded Nigeria’s sovereign rating earlier in 2025 on improved fiscal and external metrics, signalling stronger macro cushions for now. But the agency’s sector commentary underlines that, at the bank level, profitability metrics and asset quality trends will determine whether the positive macro momentum is durable or transient.
The MPR cut to 27% signals a pivot toward growth after a long period of restrictive policy. For banks, the immediate outlook is a squeeze on traditional interest income as asset yields adjust faster than deposit pricing, even as CRR relief and rising liquidity provide partial offset. The winners will be banks that act quickly to diversify revenue, deploy freed liquidity prudently, and tighten cost-efficiency and those that can benefit from an uptick in credit demand without sacrificing asset quality.
