CBN Affirms Use Of Loan Deposit Ratio To Tackle Inflation

The Central Bank of Nigeria (CBN) has reaffirmed its use of the Loan Deposit Ratio (LDR) as a crucial tool in managing Nigeria’s inflationary pressures, expressing confidence that this strategy will effectively mitigate headline inflation despite challenges in the agricultural supply chain.

Reducing the LDR of banks from 65 percent to 50 percent, the CBN aims to foster economic stability, emphasising the importance of channelling funds into the real sector to stimulate growth.

CBN’s acting director in banking supervision, Adetona Adedeji explained the rationale behind this policy adjustment during a recorded podcast titled “Loan to Deposit Ratio Adjustment.”

“If you want to combat inflation using the orthodox method, you need to balance what you do with the monetary policy tools and other measures,” CBN’s acting director in charge of the banking supervision Adetona Adedeji said during the recorded podcast that was posted on the bank’s website.

Adedeji underscored the relationship between the LDR, monetary policy rate, and cash reserve ratio, stating that contractionary measures necessitate increases in both the Monetary Policy Ratio and Cash Reserve Ratio. Lowering the LDR, he argued, is instrumental in controlling inflation, aligning with the CBN’s mandate to maintain price stability amidst inflationary pressures.

Commercial banks are directed to adhere to the prescribed LDR levels, ensuring ongoing assessment of compliance based on daily figures. Adedeji emphasised the significance of the LDR in evaluating banks’ lending capacity, risk management, and financial system stability.

“The contractionary measure of the CBN means that it wants to reduce money supply. And when an economy is experiencing inflationary pressure as it is currently with Nigeria, it is the duty of the apex bank to ensure price stability.

“To achieve this, the apex bank uses diverse means including the option of adjusting the money supply, the best option is to bring down the LDR to ensure that banks’ ability to lend more to the economy and circulate more cash is reduced,” he said.

He said the central bank is trying to combat inflation in different ways to give the economy a facelift. “And that is exactly what the central bank is doing today. Whatever it takes to fight inflation, we’re going to do that,” he stated.

“Sometimes it’s not the quantum of credit that you’re able to churn out that matters, but the quality of the credit you’re able to package. In line with the CBN mandate, the apex bank is utilising orthodox monetary policy to manage the economy and LDR is one of the metrics used to evaluate banks’ lending activities, relative to their deposit base,” he stated.

In addressing inflation, the CBN employs a multifaceted approach, prioritising the quality rather than the sheer quantity of credit disbursed. Adedeji affirmed the CBN’s commitment to leveraging orthodox monetary policy tools, including the LDR, to uphold its mandate and foster economic resilience.