CBN’s Insistence On 65% As Loan To Deposit Ratio For Banks : How Can It Deepen Productivity?

The Oasis Reporters

January 11, 2020

A cursory examination of bank figures reveal that the vault of many of the top tier banks are indeed, deep with depositor funds, shareholder funds etc. Throw in the added fact that many banks earn huge incomes from the varied services they render, especially now that tech savvy banks are reaping in huge income by harnessing smart technology to leverage on unprecedented earnings, one would then appreciate why bank stocks are rising rapidly because they are indeed prospering.

Yet on the flip side, one would find their deposit to loan ratio on a rather low side.
In cognizance of that therefore, the Central Bank of Nigeria (CBN) says the minimum loan to deposit ratio for commercial banks would remain at 65% in the interim.

In a statement signed by Ahmad Abdullahi, its director of banking supervision, the apex bank said it has noticed a remarkable increase in the size of credit to customers since the policy was introduced.

The CBN enjoined all deposit money banks to maintain this level as well as ensure that average daily figures were applied to assess compliance.

“The incentive which assigns a weight of 150% in respect of lending to small and medium enterprises (SMEs), retail, mortgage as well as consumer lending shall continue to apply,” the statement reads..

“While failure to achieve the target shall continue to attract a levy of additional cash reserve requirement of 50% of the lending shortfall of the target LDR on or before March 31, 2020.

“DMBs are further encouraged to maintain strong risk management practices regarding their lending operations”.

Cash reserve ratio is the share of customers deposit that is kept with the Central Bank.

The apex bank said it would continue to monitor compliance, review market development and make further alterations in the LDR as it deems appropriate.

The CBN first increased the LDR to 60% in July 2019 as part of its efforts to increase lending to the real sector; which it says would spur economic growth.

The Oasis Reporters’ economic team have equally noted that many banks who push out less lending tend to enjoy higher returns while the big lenders suffer a decline in profitability. We shall be looking at their balance sheet while making our analysis in due course. At the same time, we’d be finding out why things are the way they are..

Traditionally, banks should collect depositors funds and lend out to real sectors that propel both economic growth, and the prosperity of the citizenry.
Here’s a reason why such traditional beliefs are changing.
Now, banks make more money through varied electronic services like wire transfers and other fee based services. To let them prosper at a slower level from fee based banking, the Central Bank of Nigeria, CBN recently ordered a cut ranging between 40-60% on charges, thereby reducing the earnings by banks and returning the excess to the pockets of customers.

In order to drive banks into lending to real sectors, stiff penalties are being imposed by the CBN. But when the commercial banks try to open the financial space for the small and medium enterprises that many young Nigerians operate in, they find poorly articulated mission business proposals and the fact that business knowledge is lacking in most of them. Lending becomes a matter of toying with huge risks.

The preparedness of clients to roll in business ethics like delayed gratification for business to grow first is lacking. Ability to take more workable business strategy positions is another challenge. Working in seamless synergy with partners harmoniously is yet another knotty issue.

It all goes back to the level or amount of business education and mentorship training that there is available.

Most importantly, business schools would need to “upscale” training methods and academic programmes would need to be holistically revamped to be more relevant to industry and commerce.
Besides, a conscious effort must be put in place for the gown to meet the town. University curricular needs urgent revamping. Let it have a smooth bridge from academia, direct to industry.

To bridge the knowledge gap, remote censorship and guidance strategy can be put in place by banks to watch over their financial investments and mitigate risks without ruffling feathers in such a way that everyone wins. The reason is, when industry falters, financial houses lose and a country’s overall economic well-being, suffers.

Written by Greg Abolo.

Additional information from The Cable.

Greg Abolo

Blogger at The Oasis Reporters.

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