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Reasons Why CBN Directed DMBs to Loan out their Deposits Revealed

For any country to survive, it economy must boom, and for this to happen, there must be a transformation made possible by the creation of conducive and enabling environment for businesses to thrive, as well as formulating goal-oriented policy initiatives to make the country an economic hub.

This was what the Central Bank of Nigeria (CBN) had in mind when it directed all Deposit Money Banks (DMBs) to lend out a minimum of 60% of their deposits. This move, according to the apex bank, is also to improve lending to the real sector of the country’s economy.

In a letter to all banks titled, “Regulatory measures to improve lending to economy”, signed by Ahmad Abdullahi, CBN’s Director, Banking Supervision, the apex bank made known that its new directive would take effect from September 2019.

Consequently, DMBs are required to maintain a minimum loan to Deposit Ratio (LDR) of 60% by September 30, 2019. This ratio, the Central Bank said shall be subject to quarterly review.

CBN, however, warned that failure of any DMB to meet the minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50% of the lending shortfall of the target LDR.

The letter read, “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% 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% 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% of the lending shortfall of the target LDR.”

Why this matter: With an average LDR around 40%, it would not be erroneous to assert that Nigerian banks are some of the most reluctant lenders in major emerging markets. According to a data compiled by Bloomberg, the average ratio across Africa is 78%. South Africa tops the chart with 90% while Kenya Kenya is at 76%.

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A look into what the LDR entails: LDR is an instrument deployed to assess a bank’s liquidity by comparing its total loans to its total deposits for the same period. In this process, if the ration appears 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.

Source: nairametrics

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