CEM REPORT, FINANCE| In a move signaling a more cautious approach to monetary policy, the Central Bank of Nigeria (CBN) has issued a directive reducing the loan-to-deposit ratio (LDR) for commercial banks from 65% to 50%, effective immediately.
This new directive, referenced as BSD/DIR/PUB/LAB/017/005 and signed by the Acting Director of Banking Supervision, Adetona Adedeji, marks a significant shift in the CBN’s stance.
The LDR is a key metric that regulates a bank’s lending activity. It dictates the proportion of customer deposits that a bank can lend out. A higher LDR encourages banks to lend more, potentially stimulating economic growth. However, a very high LDR can also expose banks to liquidity risks if they are unable to meet unexpected withdrawal demands.
LDR Reduction Impact
This policy change comes amidst concerns about rising inflation and potential external pressures on Nigeria’s foreign reserves. By reducing the LDR, the CBN aims to curb inflationary pressures by limiting the money supply in circulation. This tightening measure follows a recent increase in the Cash Reserve Ratio (CRR) for banks, another tool used by the CBN to control liquidity.
The impact of this new policy is likely to be two-fold. Banks will need to adjust their lending portfolios, potentially making it more difficult for some businesses and individuals to access loans. This could dampen economic activity in the short term. However, the CBN expects the new LDR to promote more prudent lending practices by banks and contribute to overall price stability in the long run.
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The CBN has assured banks that they will continue to monitor compliance and adjust the LDR as necessary based on market developments. They have also emphasized the importance of maintaining robust risk management practices during this period of transition.
Financial experts are divided on the potential impact of this policy change. Some believe it is a necessary step to curb inflation, while others worry it could stifle economic growth. The coming months will be crucial in determining the effectiveness of this new monetary policy measure.
