The Central Bank of Nigeria, CBN, has released a new regulatory directive to enhance lending to the real sector of the Nigerian economy.
The directive, issued on April 17, 2024, with reference number BSD/DIR/PUB/LAB/017/005 and signed by the Acting Director of Banking Supervision, Adetona Adedeji, signifies a notable shift in the bank’s policy towards a more contractionary approach.
In line with the new measures, the CBN has reduced the loan-to-deposit ratio by 15 percentage points, down to 50 per cent.
This move aligns with the CBN’s current monetary tightening policies and reflects the increase in the Cash Reserve ratio rate for banks.
The LDR is a metric used to evaluate a bank’s liquidity by comparing its total loans to its total deposits over the same period, expressed as a percentage.
An excessively high ratio may indicate insufficient liquidity to meet unexpected fund requirements.
All Deposit Money Banks are now mandated to adhere to this revised LDR.
The CBN has stated that average daily figures will be utilised to gauge compliance with this directive.
Furthermore, while DMBs are encouraged to maintain robust risk management practices in their lending activities, the CBN has committed to continuous monitoring of adherence and will adjust the LDR as necessary based on market developments.
Adedeji has called on all banks to acknowledge these modifications and adjust their operations accordingly. He emphasised that this regulatory adjustment is anticipated to significantly influence the banking sector and the wider Nigerian economy.
The circular read in part, “Following a shift in the Bank’s policy stance towards a more contractionary approach, it is crucial to revise the loan-to-deposit ratio policy to conform with the CBN’s ongoing monetary tightening.
“Consequently, the CBN has decided to decrease the LDR by 15 percentage points to 50 per cent, proportionate to the rise in the CRR rate for banks.
“All DMBs must maintain this level, and it is advised that average daily figures will still be applied for compliance assessment.
“While DMBs are urged to sustain strong risk management practices concerning their lending operations, the CBN will persist in monitoring compliance, reviewing market developments, and making necessary adjustments to the LDR. Please be guided accordingly.”