In a bid to boost economic growth, the Central Bank of Nigeria (CBN), yesterday, mandated Deposit Money Banks, DMBs, to give out minimum of 60 percent of their deposits as loans with effect from September 2019.
This was stated in a letter to all banks titled, “Regulatory measures to improve lending to economy”, signed by Ahmad Abdullahi, Director, Banking Supervision, CBN.
It stated: “In order to ramp up growth in the Nigerian economy through investment in the real sector, CBN has approved the following measures: All DMBs are hereby required to maintain a minimum Loan to Deposit Ratio (LDR) of 60 percent by September 30, 2019.
“This ratio shall be subject to quarterly review to encourage SMEs, Retail, Mortgage and Consumer lending, these sectors shall be assigned a weight of 150 percent in computing the LDR for this purpose.
The CBN shall provide a framework for classification of enterprises/businesses that fall under these categories.
“Failure to meet the above minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50 percent of the lending shortfall of the target LDR.”
LDR is used to assess a bank’s liquidity by comparing a bank’s total loans to its total deposits for the same period.
If the ratio is too high, it means that the bank may not have enough liquidity to cover any unforeseen fund requirements, especially if the loan repayments fall short of schedule.
Conversely, if the ratio is too low, the bank may not be earning as much as it could from the deposits it had taken at a cost. ‘
Nigerian banks are some of the most reluctant lenders in major emerging markets, with an average LDR around 40%.
The average ratio across Africa is 78%, according to data compiled by Bloomberg, which noted that South Africa is on top of the chart at 90% and Kenya is at 76%.
Risk-averse Nigerian banks have resisted lending to businesses and consumers and instead piled their cash into Naira bonds, which yield 14.3% on average, one of the highest rates globally.