Emmanuel OchayiIn a move aimed at tightening its monetary policy, the Central Bank of Nigeria (CBN) has announced a reduction in the Loan-to-Deposit Ratio (LDR) for commercial banks from 65 percent to 50 percent.
This means that banks are now allowed to lend only half of their deposits to customers.
The directive, issued on April 17, 2024, by the CBN’s Acting Director of Banking Supervision, Adetona Adedeji, comes as part of efforts to regulate lending practices and manage economic stability. Adedeji emphasized the significance of the regulatory adjustment, stating that it is expected to have a significant impact on both the banking sector and the broader Nigerian economy.
In the circular issued by the CBN, Adedeji highlighted the rationale behind the decision, stating, “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.”
The CBN’s decision to reduce the LDR by 15 percentage points reflects its commitment to implementing a more stringent monetary policy framework. The move aligns with the apex bank’s efforts to curb inflationary pressures and promote financial stability in the country.
All Deposit Money Banks (DMBs) are mandated to adhere to the revised LDR, with the CBN emphasizing the use of average daily figures for compliance assessment. Additionally, banks are urged to maintain robust risk management practices in their lending activities to mitigate potential risks associated with the new policy measures.
Adedeji urged banks to acknowledge the modifications and adjust their operations accordingly to ensure compliance with the directive. He reiterated the CBN’s commitment to continuous monitoring of compliance with the revised LDR and emphasized the importance of banks aligning their lending practices with the regulatory requirements.
In response to the CBN’s directive, banking industry stakeholders have expressed mixed reactions. Some analysts view the reduction in the LDR as a necessary step to moderate credit expansion and address concerns about rising inflation and exchange rate volatility. However, others raise concerns about the potential impact on credit availability and economic growth, particularly for small and medium-sized enterprises (SMEs) that rely heavily on bank financing.
Speaking on the implications of the CBN’s decision, Dr. Olabisi Adeyemi, an economist at a Lagos-based consultancy firm, stated, “The reduction in the Loan-to-Deposit Ratio is likely to tighten credit conditions, making it more challenging for businesses to access financing. While this may help to contain inflationary pressures, it could also dampen investment and economic activity in the short term.”
Adeyemi emphasized the importance of striking a balance between monetary tightening measures and supporting economic growth, particularly in the context of Nigeria’s efforts to recover from the impacts of the COVID-19 pandemic and sustain long-term development objectives.
Looking ahead, stakeholders will closely monitor the implementation of the CBN’s directive and its impact on lending patterns, economic growth, and financial stability. As the central bank continues to navigate the evolving economic landscape, ensuring effective coordination between monetary policy measures and broader economic objectives will be essential to fostering sustainable and inclusive growth in Nigeria.
