RegTech

CBN Asked Banks to Keep 60% Minimum Loan-to-Deposit Ratio by September and Create Credit Flow in Africa’s Biggest Economy

PSB
Governor of Central Bank of Nigeria (CBN), Mr. Godwin Emefiele

SARAH BOLAJI

The Central Bank of Nigeria [CBN] has asked the banks to keep 60% minimum loan-to-deposit ratio by September as part of a series of regulatory measures aimed at getting credit flowing in Africa’s biggest economy.

The regulator said in a circular dated July 3 that lenders who fall short of the target loan-to-deposit ratio would face higher cash reserve requirements. The bank is seeking to boost credit to businesses and consumers.

Lenders have failed to expand borrowing in Nigeria, blaming a weak economy after an oil price crash in mid-2014 triggered a recession and a currency crisis made loans go sour.

Nigeria’s economy has since recovered, but lending has not returned as growth is slow and banks prefer to pack cash in risk-free government securities rather than lend to businesses and consumers.

“Failure to meet the above minimum LDR (loan-to-deposit ratio) 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 central bank said.

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The new loan ratio will be subject to quarterly review. The regulator has also kept cash ratios at 30% for more than two years in a bid to maintain tight liquidity to curb inflation, attract foreign investors into bonds and support the currency.

But the policy has encouraged banks to lend more to the government rather than businesses. Private sector credit growth has been negative for several years which some economists say has not helped the recovery.

Last week, the central bank said it would continue with a managed currency float but would pursue a recapitalisation for the banking sector over the next five years after a series of currency, devaluations weakened bank capital.