CBN eases loan restrictions 15% to curb inflationary pressure on banks

Business a.m.

The Central Bank of Nigeria (CBN) has introduced a  policy change aimed at tightening the country’s monetary framework. The new measure reduces the Loan-to-Deposit Ratio (LDR) from 65 per cent to 50 per cent, an indication that deposit money banks (DMBs) will now be required to limit their lending activity to a maximum of 50 per cent of their total deposits.

In a recently circulated directive, the CBN announced that the LDR for DMBs in the country had been reduced by a significant margin of 15 percentage points, from 65 per cent to 50 per cent. Adetona Adedeji, the CBN acting director of banking supervision, communicated the update to the media via the official directive, Reference Number BSD/DIR/PUB/LAB/017/005, dated April 17, 2024.

In the wake of this significant policy change, all DMBs in Nigeria have been directed to abide by the newly reduced LDR of 50 per cent. The CBN clarified that average daily figures, as opposed to end-of-month figures, will be used as the basis for assessing compliance with this revised LDR. 

In addition to mandating adherence to the revised Loan-to-Deposit Ratio, the CBN has highlighted the importance of robust risk management practices in lending activities by DMBs. The apex bank also affirmed its commitment to maintaining close monitoring of DMBs’ compliance with this directive, further underscoring the gravity of the policy change and the CBN’s resolve to ensure that the financial sector remains stable and well-regulated in the wake of this adjustment.

The acting director of banking supervision at the CBN, called on all DMBs to take note of the change and adapt their operations in compliance with the revised LDR. He further highlighted the potential ramifications of this regulatory adjustment, noting that it is likely to have significant implications not only for the banking sector but also for the wider Nigerian economy.

The circular stated: “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.

“Consequently, the CBN has decided to decrease the LDR by 15 percentage points to 50 percent, proportionate to the rise in the CRR rate for banks.

“All DMBs must maintain this level, and it is advised that average daily figures will still be applied for compliance assessment.”

The CBN called on DMBs to ensure that their lending operations are underpinned by robust risk management practices. The apex bank has also pledged to continue monitoring DMBs’ compliance with the new LDR, taking into account any developments in the financial sector.