CBN raises banks’ deposits ratio to 65%, directs lending to SMEs

Central Bank of Nigeria, CBN
Central Bank of Nigeria (CBN)

The Central Bank of Nigeria (CBN) has again raised the Loan to Deposit Ratio (LDR) of banks from 60 to 65 percent to raise real sector lending.

Recall the CBN had increased the LDR to 60 percent and given September 30th for banks to comply. In the new directive, the apex bank is giving December 31, 2019 for compliance.

It gave the directive in a letter signed by the Director of Banking and Supervision, Bello Hassan, to all banks on, ‘Regulatory Measures to Improve Lending to the Real Sector of the Nigerian Economy’.

The bank said the credit level in the sector grew by N829.4 billion or 5.33 percent by May; from N15.56 trillion to N16.39trn as of September 26th.


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The circular read: “The Central Bank of Nigeria has noted the appreciable growth in the level of the industry growth credit, which increased by N829.4bn or 5.33 per cent from N15.56tn at the end of May 2019 to N16.39tn as at September 26, 2019, following its pronouncement on the above initiative.

“In order to sustain the momentum and in line with the provisions of our earlier letters,  the minimum Loan to Deposit Ratio target for all Deposit Money Banks is hereby reviewed upwards from 60 per cent to 65 per cent.

“Consequently, all DMBs are required to attain a minimum LDR of 65 per cent by December 31, 2019 and this ratio shall be subject to quarterly review.

“To encourage Small and Medium Enterprises, retail mortgage and consumer lending, these sectors shall be assigned a weight of 150 per cent in computing the LDR for this purpose,” it said.

The CBN also warned that “failure to meet the above minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50 per cent of the lending shortfall implied by the target LDR.”

It noted that the “DBNs are required to continue to strengthen their risk arrangement practices particularly with regard to their lending operations.”

Experts’ differ on directive

Some experts on Wednesday expressed their views on this pronouncement. An Economist and former chief executive of a bank who prefers not to be named said the CBN is trying to force the banks to lend to the real sector even when the real incentives are not there.

The CBN has refused to bring down the benchmark lending rate currently at 13.5 percent thus making interest bank loans still high.

“The banks that have taken the risks to lend have huge non-performing loans to deal with. Thus most of the banks prefer investing in more secured fixed instruments where returns are guaranteed,” he said.

He noted that, with the new policy, banks who fail to lend will have 50 percent of their excess liquidity quarantined into credit reserve ratio at zero interest rate.

He also prayed the newly constituted Economic Advisory Council to intervene in harmonising monetary policies with fiscal policies to spur economic growth.

The banker with over two decades of experience feared customers might be negatively impacted.

“At some point, if deposits in the banks won’t yield any profits because the banks can’t invest in fixed instruments and since the banks are scared of non-performing loans, the banks will reduce interests on deposits to discourage more deposits. If the banks are unable to do this, they could introduce hidden charges to make some money from the deposits,” he explained.

Also commenting, Dr. Bongo Adi, a lecturer at the Lagos Business School said “credit to the private sector at some point was negative so the banks weren’t lending.”

He said the reason why the banks haven’t been lending is the high level of risks, adding that the bankability of projects in Nigeria is also a challenge.

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