The Central Bank of Nigeria (CBN) has announced a reduction in the loan-to-deposit ratio (LDR) for banks from 65 percent to 50 percent.
The LDR, a key metric used to evaluate a bank’s liquidity by comparing its total loans to its total deposits, plays a crucial role in determining a bank’s lending capacity.
A higher LDR allows banks to extend more credit to businesses and individuals, while a lower LDR limits their ability to lend from depositors’ funds.
The CBN disclosed this adjustment in a circular titled ‘Re: Regulatory Measures to Improve Lending to the Sector of the Nigerian Economy,’ signed by Adetona Adedeji, the acting director of the banking supervision department, on Wednesday.
“Following a shift in the Bank’s policy stance towards a more contractionary approach, it is imperative to review the loan-to-deposit ratio (LDR) policy to align with the current monetary tightening by the CBN,” the circular states.
“Accordingly, the CBN has decided to reduce the LDR by 15 percentage points to 50%, in a similar proportion to the increase in the CRR rate for banks.
“All DMBs are required to maintain this level and are further advised that average daily figures shall continue to be applied to assess compliance.
“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.”
