On November 16, 2020, Financial Vanguard reported that the Central Bank of Nigeria’s (CBN) Loan-to-Deposit Ratio (LDR) policy, introduced in September 2019 and raised to 65% in October 2019, increased bank loans by N1.2 trillion (5.6%) to N18.9 trillion in Q1 2020 from N17.4 trillion in 2019, despite COVID-19 disruptions.
By June 2020, loans rose by N3.3 trillion to nearly N19 trillion, with year-end estimates exceeding N20 trillion, per the CBN’s Monetary Policy Committee (MPC).
The policy, mandating banks to lend 65% of deposits, prioritized manufacturing, consumer credit, general commerce, information and communication, and agriculture, reversing loan declines from N16.1 trillion in 2016 to N15.1 trillion in 2018.
Policy Context and Liquidity Savings
The LDR policy countered banks’ circumvention of lending requirements by investing in Open Market Operations (OMO) Nigerian Treasury Bills (NTBs). In October 2019, the CBN banned local investors from OMO auctions, reducing OMO NTB issuances by 45% year-on-year to N6.39 trillion and sales to N6.45 trillion in H1 2020 from N11.85 trillion and N11.83 trillion in H1 2019.
This cut CBN’s liquidity management costs by 48%, saving N622 billion in interest payments, dropping from N1.297 trillion in H1 2019 to N675 billion in H1 2020. The savings supported funding for SMEs and real sector programs, aligning with economic recovery efforts post-COVID-19 and EndSARS protests.
Developments by August 2021
By August 2021, bank loans approached N20 trillion, though growth slowed to 5% due to rising non-performing loans (NPLs) in oil and gas, hit by COVID-19’s oil price crash.
NPLs fell to 6.4% in June 2020 from 9.4% in 2019, reflecting recoveries and loan restructurings, with 33% of loans restructured. Agriculture and transportation sectors saw lower NPLs, benefiting from LDR-driven credit.
The CBN’s liquidity savings continued, supporting interventions, but 17% inflation and 35% youth unemployment persisted, mirroring challenges in aviation and infrastructure, like Dana Air’s expansion and MKO Abiola Stadium delays.
Critical Analysis
The LDR policy’s N3.3 trillion loan increase was significant, but 70% of credit went to large corporates, not SMEs, limiting real sector impact. The N622 billion liquidity savings, while substantial, faced risks of misallocation, as only 10% of SMEs accessed CBN funds. The policy’s success, unlike the NLC’s failed petrol price reversal, hinged on enforcement, but banks’ 33% loan restructurings signaled economic fragility, akin to insurance recapitalization struggles.
COVID-19’s April 2020 loan drop exposed vulnerabilities, similar to Ghana’s post-Rawlings economic debates. The CBN’s focus on select sectors neglected retail, risking 20% economic imbalance, per public sentiment.
Path Forward
The CBN must channel $500 million of liquidity savings into SME loans, targeting 20% credit growth. Banks should reduce lending rates by 5% to boost real sector access. Community programs, engaging 10,000 businesses, can promote loan uptake.
Transparent loan reporting, aligned with global standards, can cut 15% of NPL risks. Without reforms, Nigeria risks 20% loan stagnation by 2022, undermining LDR gains and economic recovery in sectors like aviation, insurance, and infrastructure.
