During the week, The Central Bank of Nigeria (CBN) issued a circular mandating all banks in the country to maintain minimum Loan to Deposit Ratio (LDR) of 60 percent by end of September 2019.
Investopedia defines LDR as … the ratio is used to assess a bank’s liquidity by comparing a bank’s total loans to its total deposits for the same period. … A loan-to-deposit ratio of 100 percent means a bank loaned one dollar to customers for every dollar received in deposits it received.
This policy by the CBN, is one of the measures adopted by the regulator to ensure that financial institutions increase lending to the real sector of the economy. The lending policy is targeted at SMEs, Retail, Mortgage and Consumer Lending and with the major aim of growing economic activities spurred by the real sector.
CBN also warns that any bank that fails to comply with the policy directive will be sanctioned. The sanction will be an increased Cash Reserve Ratio to the equivalent of 50 percent of the shortfall of the LDR to targeted sectors. That means the banks will have to keep 50 percent of the unlend amount with CBN at 0 percent interest.
A review of the LDR of most banks as revealed in their 1st quarter 2019 results shows that eight of the commercial banks in the country currently have their LDR less than the mandatory 60 percent. These commercial banks are most likely going to increase lending to SMEs, Retail, Individuals before 30 September 2019 to meet up with CBN deadline.
The eight commercial Banks and their LDR computed from the Q1, 2019 reports are: Union Bank 57%, Stanbic IBTC 56%, Ecobank 56%, GTBank 53%, Zenith Bank 50%, UBA 48%, FirstBank 48% and Unity Bank 24%.
This does not necessarily translate to the fact that other commercial banks in the country will not continue to lend since the CBN policy specified minimum LDR of 60 percent. But the banks mentioned may be a little more aggressive than others in a bit to meet the requirement and not have to keep depositors fund with CBN at 0 percent interest.