What to Know As CBN Slashes Banks’ Loan-to-Deposit Ratio to 50% [Explainer]

The Central Bank of Nigeria (CBN) has recently made a significant policy change by reducing the Loan-to-Deposit Ratio (LDR) for banks from 65% to 50%.

This move is expected to have a considerable impact on the banking sector and the economy at large.

Here’s an extensive article that covers the most asked questions about this development.

Understanding the Loan-to-Deposit Ratio (LDR)

What is LDR? The Loan-to-Deposit Ratio is a measure used by banks to assess their liquidity by comparing the total amount of loans given out to the total amount of deposits received. It is expressed as a percentage.

Why is LDR important? LDR is crucial because it ensures that banks have enough liquidity to meet their short-term obligations. It also indicates the extent to which the bank is funding its loan book with its customer deposits.

The CBN’s Decision to Slash LDR

What has changed?

• The CBN has reduced the LDR from 65% to 50%.
• This means banks can now lend only 50% of their customer deposits.

Why did the CBN make this change? 

The reduction in LDR is part of the CBN’s monetary tightening policy. It aims to ease pressure on banks and allow them to comply with the Cash Reserve Ratio (CRR) of 45%.

Impact on Banks and Customers

How will this affect banks?

• Banks may see a decrease in their lending capacity.
• They are encouraged to maintain robust risk management practices.

How will this affect customers?

• Customers might experience stricter borrowing criteria.
• There could be a decrease in the availability of loans.

Compliance and Monitoring

How will compliance be monitored? 

The CBN will use average daily figures to gauge compliance and has committed to continuous monitoring.

What happens if banks do not comply? 

Non-compliance could result in penalties, though specific consequences have not been detailed.

Key Changes and Their Implications