The Central Bank of Nigeria (CBN) yesterday set a minimum loan to deposit ratio for commercial banks in the country, with sanctions for any bank with Loan-to-deposit ratio, LDR, lower than the 60 per cent it set.
The apex bank said it is part of efforts to encourage lending to the real sector of the economy.
In a letter to all banks titled “Regulatory Measures to Improve lending to the Real Sector of the Nigerian Economy” issues by the director, Banking Supervision Department of the CBN dated July 3, 2019 and released on its website yesterday, the apex bank directed that banks ensure they comply with the new minimum LDR by the end of this quarter, September 30, 2019.
Nigeria’s banks have one of the lowest LDR in emerging markets, with an average loan to deposit ratio below 60 per cent, compared with 78 per cent across Africa, according to data compiled by Bloomberg. Loan to Deposit ratio is above 90 in South Africa and about 76 per cent in Kenya.
The CBN in the letter said the move was in an effort to ramp up growth of the Nigerian economy through investment in the real sector. It said “to encourage SMEs, Retail, Mortgage and Consumer Lending, “these sectors shall be assigned a weight of 150 per cent in computing the LDR for this purpose.
Noting that it will be providing a framework for classification of enterprises/businesses that fall under the categories, the CBN said failure by the banks to meet the minimum LDR by September 30, 2019 “shall result in a levy of additional Cash Reserve Requirement equal to 50 per cent of the lending shortfall of the target LDR.”
Commercial banks shy from lending to businesses and consumers and put their funds into government securities which yield 14.3 per cent on average. Banks have always cited the recession and slow growth as a reason for shying away from lending. According to some of them, with inflation at more than 11 per cent, extending more credit could endanger the financial system through an increase in non-performing loans, NPLs.
The Nigerian economy is struggling to recover from a full-year contraction in 2016 and is expected to expand by 2.1 per cent this year. Analysts are however skeptical of the effectiveness of the measure. CSL Research in a note to clients said the new directive which could see an additional N1.4 trillion of lending if implemented, “could pose a risk to financial stability. Forcing banks to lend under the current macro-economic situation will only result in a buildup in NPLs”, it said.
Non-performing loans as a percentage of total credit in the Nigerian banking industry declined to 11 per cent in the first quarter from 14 per cent a year ago, according to the National Bureau of Statistics. The CBN also released modalities for lending under the Creative Industry Financing Initiative which targets giving out as much as N500 million to players in the Nigerian movies, music, fashion and information technology at nine per cent interest rate.
The directive on minimum LDR for banks is coming after the CBN governor, Godwin Emefiele had urged banks to boost lending or have access to risk-free assets restricted. Speaking at the most recent Monetary Policy Committee meeting in May, he said he would create “a mechanism” to limit banks’ purchases of government securities.
Past experience with such measures isn’t encouraging. The central bank last year allowed banks to use their statutory cash reserves to fund manufacturers on the condition that such loans were at a maximum interest rate of nine per cent and a minimum maturity of seven years. The lenders didn’t take advantage of the policy due to credit risk and high returns on government bonds, according to Michael Famoroti, an economist and partner at Stears Business.
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