By Adedapo Adesanya
The Central Bank of Nigeria (CBN) has announced a downward review of the loan-to-deposit ratio (LDR) for banks to 50 per cent from 65 per cent to align with the current monetary tightening.
The CBN disclosed this in a circular on Wednesday titled Re: Regulatory Measures to Improve Lending to the Sector of the Nigerian Economy, signed by Mr Adetona Adedeji, its acting director of the banking supervision department.
The LDR is used to assess a bank’s liquidity by comparing total loans to deposits for the same period, which impacts both liquidity and solvency in the short, medium and long term.
The presence of an LDR policy is to encourage banks to enhance credit delivery to the real sector of the economy, but the the slash in the LDR by the CBN will give commercial banks more cash for keeps.
The central bank said following a shift in its policy stance towards a more contractionary approach, it is imperative to review the LDR policy to align with the current monetary tightening by the CBN.
All Deposit Money Banks (DMBs) are now required to maintain this level and are further advised that average daily figures shall continue to be applied to assess compliance.
The CBN in January 2020 increased the LDR to 65 per cent but following a 600 basis point hike in 2024, the CBN has decided to reduce the LDR in a similar proportion to the increase in the CRR rate for banks.
“While DMBs are encouraged to maintain strong risk management practices regarding their lending operations, the CBN shall continue to monitor compliance, review market developments, and make alterations in the LDR as it deems appropriate,” the circular said.