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LDR as key to driving credit growth

The Central Bank of Nigeria (CBN)’s Loan to Deposit Ratio (LDR) is playing a critical role in helping to drive credit growth, even though the economy continues to reel from the impact of the COVID-19, writes TONY CHUKWUNYEM


In a letter to deposit money banks (DMBs) titled, “Regulatory measures to improve lending to economy,” posted on its website on July 4 last year, the apex bank said: “In order to ramp up growth in the Nigerian economy through investment in the real sector, the CBN has approved the following measures: All DMBs are hereby required to maintain a minimum Loan to Deposit Ratio (LDR) of 60 per cent by September 30, 2019.

“This ratio shall be subject to quarterly review. To encourage SMEs, Rmretail, mortgage and consumer lending, these sectors shall be assigned a weight of 150 per cent in computing the LDR for this purpose.

“The CBN shall provide a framework for classification of enterprises/businesses that fall under these categories. Failure to meet the above minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50 percent of the lending shortfall of the target LDR.”

Given that the LDR is used to assess a bank’s liquidity by comparing the lender’s total loans to its total deposits for the same period, analysts noted that the CBN’s letter was, in effect, a directive to lenders to give out a minimum of 60 per cent of their deposits as loans with effect from September 2019.

Analysts also pointed out at the time that the CBN had to take the step after its repeated appeals to DMBs to increase lending to the real sector in order speed up the country’s sluggish economic growth, largely went unheeded.

Policy success

With the LDR policy appearing to be an instant success as the CBN said it was responsible for the additional N829.4 billion loans that were extended by DMBs between May and September 2019, the apex bank subsequently reviewed the minimum LDR requirements for DMBs from 60per cent to 65per cent, which the lenders had to meet by December 31, 2019.

However, in keeping to its threat of applying sanction for noncompliance, the CBN slammed about N499.1billion on 12 banks as additional CRR for failing to attain the initial 60 per cent LDR by the September deadline. Although it has been regularly debiting lenders that fail to maintain the minimum LDR, the success of the policy is clearly not in in doubt as data released by the CBN since the rule was introduced show a steady increase in DMBs’ loans to the private sector.

For instance, in a report released last week, analysts at CSL Research examined the impacts of the policy on the overall economy after over a year of implementation and concluded that the CBN has been successful in using it to drive credit growth.

The analysts stated: “According to data sourced from the Nigerian Bureau of Statistics (NBS), aggregate banking sector credit to the economy stood at N18.8 trillion at the end of Q2’20, which represents an increase of 15.8 per cent from the aggregate banking sector credit of N16.3 trillion at the end of Q3’19 before the minimum LDR was raised to 65.0 per cent.

“Much more impressive is the 24.4 per cent growth in aggregate banking sector credit when compared with the total of N15.1 trillion at the end of Q2’19 before the minimum LDR of 60.0 per cent was announced. This compares with a decline of 2.3 per cent and 3.9 per cent in aggregate banking sector credit in 2017 and 2018.

Thus, on the credit growth front, it can be said that the CBN has been successful at driving credit growth.” Also, on the impact of the policy on borrowing costs in the economy, the analysts said: “We believe many corporates moved to refinance their expensive loans following the steep decline in borrowing costs. We note that this was evident in the financial performance of deposit money banks as many reported steep declines in cost of funds.
In addition, we note that several corporates have taken advantage of the lower borrowing costs to raise cheap financing (long term & short term) from the debt capital markets. “For example, corporates like Flour Mills, Nigerian Breweries and Dangote Cement have all raised funding via commercial papers at low and mid-single digits in 2020. That said, we note that the LDR policy was not the sole driver of the decline in borrowing costs but it was one of many policy levers implemented by a dovish CBN.”

MPC’s endorsement

Indeed, the LDR policy has also received the critical support of the CBN’s Monetary Policy Committee (MPC) as virtually every communiqué issued by the committee at the end of its meetings since the beginning of the year has commended the policy.

For instance, the communiqué issued at the end of the MPC’s meeting in March, states that “the committee noted with satisfaction the growth in aggregate credit by N2.35 trillion since the inception of the LDR policy, reflecting the potency of the policy and thus urged the Management of the Bank to sustain the current momentum of improved flow of credit to the private sector in Nigeria.”

Equally, the communiqué issued at the end of the committee’s meeting in May said: “The committee noted the stability in the banking system shown by the increase in total asset by 18.8 per cent and total deposits by 25.52 per cent (year-on-year). The performance of the Loan-to-Deposit Ratio (LDR) policy which was introduced in July 2019 showed that total credits increased by N3.1 trillion or 20.45 per cent, with manufacturing, retail & consumer loans, general commerce and agriculture as major beneficiaries.”

Furthermore, personal statements of MPC members at the committee’s meeting in September showed strong support for the policy among them. In her personal statement, for instance, the Deputy Governor, Financial Systems Stability Directorate, CBN, Mrs. Aisha Ahmad, stated: “Six months into the pandemic, the financial system continued to show resilience with soundness indicators retaining their robustness, amidst regular stress testing by the CBN.

Non-performing loans ratio declined to 6.1 per cent in August 2020, from 6.4 per cent in the previous month, capital adequacy improved to 15.3 per cent from 14.6 per cent over the same period even as net interest margin remained robust.

“Focused implementation of the Loans to Deposit (LDR) policy over the last year continues to promote credit growth to the real sector and lower deposit and lending rates, – which supported banks’ net interest margins. For instance, credit to the economy increased by N3,766.08 billion from N15,567.66 billion at end-May 2019 to N19,333.74 billion at end-August 2020, with significant growth recorded in manufacturing consumer credit, general commerce and agriculture.

“Staff reports presented at the meeting also show prime lending rates declined (15.40 per cent in August 2019 to 11.76 per cent in August 2020), in sync with money market rates (1year NTB rate from double digit in 2019 to 3.30 per cent in August 2020) and Open Buy Back rates (from 12.35 per cent in August 2019 to 8.22 per cent in August 2020).

This lower interest rate environment coupled with improved credit conditions survey which indicated that more households are accessing finance presents an opportunity to further increase credit to the real economy at lower cost, critical to driving the much-needed recovery.” She emphasised that in order to coordinate effectively with the fiscal authorities to ensure economic growth, the CBN must, among other policy measures, sustain implementation of the minimum LDR policy. Similarly, in his personal statement at the MPC meeting, the Deputy Governor, Economic Policy, CBN, Dr. Kingsley Obiora, said: “Despite the persistence of the pandemic, the financial system has remained relatively stable and robust to withstand shocks. Credit to various sectors witnessed a significant boost from N15.57 trillion to N19.33 trillion between May 2019 and August 2020.

“This outcome reflects the continued implementation of the Loan-Deposit Ratio (LDR) Policy. In particular, the growth in credit was mainly directed to manufacturing (N866.27 billion), consumer credit (N527.65 billion), oil & gas (N477.65 billion), agriculture (N287.11 billion) and construction (N270.97 billion). Short-term interest rates continue to suggest declining surfeit in the system with average Open Buy Back (OBB) rate decreasing to 8.39 per cent in August 2020 from 10.12 per cent in July 2020.”

Analysts note that that the success of the LDR policy, so far, has proved global credit rating agencies, such as Fitch Ratings and Moody’s Investors Service, wrong. The agencies had warned at the time that the policy was introduced that it will be credit negative for Nigerian banks, as it would likely force them to turn on their lending tap to riskier borrowers, thereby putting their asset quality at risk.


However, according to the CSL Research analysts in their recent report on the LDR policy, “we think the CBN’s overriding objective was to trigger accelerated recovery in economic growth. However, we retain our view that a fiat-driven strategy may not be sufficient to accelerate economic growth given the presence of many structural challenges. “That said, the advent of COVID-19 and its economic challenges make it difficult to measure the real impact of the LDR policy on economic growth. Nevertheless, we note that GDP growth in Q1’20 (before Nigeria began feeling the full impact of the covid-19 crises) slowed to 1.87 per cent compared to the 2.12 per cent before the 60.0 per cent LDR policy was announced and 2.28 per cent after it was raised to 65.0 per cent.

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