Nigeria is set to launch its economy back on track. The Central Bank of Nigeria is now making it mandatory for money deposit bank in Nigeria to maintain loan to deposit ratio of 60% effective September 30, 2019.
The statement from the bank reads as follows:
In order to ramp up growth of the Nigerian economy through investment in the real sector, the Central Bank of Nigeria (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.
2) 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.3) 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.
The CBN shall continue to review development in the market with a view to facilitating graeter investment in the real sector of the Nigerian economy.
This is The First Time The Central Bank of Nigeria Is Weighing In On Minimum Lending Ratio
Previously, there Nigeria had no rule on minimum loan-to-deposit ratios. However, many Nigerian lenders have pegged ratios of about 40%.
However, Nigerian banks are so reluctant with lending to businesses and have resisted lending to businesses and consumers and instead piled their cash into naira bonds, which yield 14.3% on average, one of the highest rates globally.
Lenders worry that with inflation at more than 11%, extending more credit could endanger the financial system through an increase in non-performing loans, or NPLs.
That makes some analysts skeptical of whether the new measures will work.
“Forcing banks to lend under the current macro-economic situation will only result in a buildup in Non-performing loans,” analysts at Lagos-based CSL Research, including Gloria Fadipe, said in a note to clients.
“This could pose a risk to financial stability.”
CSL estimates it could result in an additional 1.4 trillion naira ($3.9 billion) of lending if the central bank gets its way.
Bad Loans
Non-performing loans as a percentage of total credit in the Nigerian banking industry declined to 11% in the first quarter from 14% a year ago, according to the National Bureau of Statistics.
Past experience with such measures isn’t encouraging. The central bank last year allowed banks to use their statutory cash reserves to fund manufacturers on the condition that such loans were at a maximum interest rate of 9% and a minimum maturity of seven years. The lenders didn’t take advantage of the policy due to credit risk and high returns on government bonds, according to Michael Famoroti, an economist and partner at Stears Business.
The Implication of This To Businesses
With this move, it is expected that Nigerian money deposit banks are going to loosen up money to Nigerians. For businesses desiring to raise funds, this is the best time to laugh as more banks would be rushing after them. However, it remains whether Nigeria’s commercial banks would not fight back, by either setting up SPVs or lending to more stable corporations, in which case the vision of the CBN may have been defeated.
So businesses should dust up their loan procurement files and get set for September 30, 2019.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world.