The Central Bank Governor, Godwin Emefiele was widely criticized in his first tenure for being too conservative as regards to the exaction of his regulatory power on players in the financial sector, especially when being compared with the erstwhile leaders of the apex bank. That tide seems to have change, (assuming the allegations were true), as the central bank, under the leadership of Godwin Emefiele has come out recently with two substantial regulatory policies pronouncing that deposit money banks in the country should give out 60 percent of their deposits to customers as loan with effect from September 2019; subject to quarterly review and keeping in view that there would be need for banks in the country to recapitalize , an exercise that was last done over a decade ago. What readily came to mind after the pronouncement was the survival tendency of some banks that are already being burdened by weights of non-performing loans exposures ravaging their bottom-line.
According to the apex regulatory body, the new rule is to encourage SMEs, retail, mortgage and consumer lending and also to boost the confidence level in the financial system of the most populous nation in Africa.
Considering the first mentioned policy, according to the Apex Bank, failure to meet the minimum LDR (Loan to Deposit Ratio) by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50 percent of the lending shortfall of the target LDR.
LDR is used to assess a bank’s liquidity by comparing a bank’s total loans to its total deposits for the same period. If the ratio is too high, it means that the bank may not have enough liquidity to cover any unforeseen fund requirements, especially if the loan repayments fall short of schedule. Conversely, if the ratio is too low, the bank may not be earning as much as it could from the deposits it had taken at a cost.
Nigerian banks are some of the most reluctant lenders in major emerging markets, with an average LDR around 40%. The average ratio across Africa is 78%. Risk-averse Nigerian banks have resisted lending to businesses and consumers but rather invest in Naira bonds, which yield 14.3% on average, one of the highest rates globally.
It is so easy though to blame these lenders for their miserly lending pattern but a privileged interactions with some of these bank CEOs reveals that it is most times difficult to get most borrowers to pay back loans they accessed hence they prefer to deploy the available funds to more profitable ventures since profit making is one of their core existence and survival strategy as a business entity.
A few among the deposit money banks in Nigeria may now be under pressure to beef up their loan portfolio following directive by the Central Bank of Nigeria which requires banks to give out 60 percent of their deposits as loans to the real sector.
Based on the audited financial report for 2018 for banks listed on the floor of the Nigerian Stock Exchange, seven commercial banks have loan to deposit ratio (LDR) higher than the new requirement of 60%. These banks include: Fidelity Bank (86.77%), Sterling Bank (81.65%), FCMB (73.53%), Wema Bank (68.31%), Ecobank Transnational Incorporated (62.56%), First Bank of Nigeria Holdings (60.13%) and Access Bank Plc (60.01%).
Commercial banks with loan to deposit ratio lower than the new requirement of 60% in the 2018 financial year include Guaranty Trust Bank (53.55%), Union Bank of Nigeria (49.47%), Zenith Bank (49.40%), United Bank for Africa (49.12%), Stanbic IBTC (45.59%) and Unity Bank (12.75%).
Banks that falls below the 60% loan to deposit ratio would be compelled to shore up their loan position.
To measure up with the new loan mandate, Guaranty Trust Bank would likely have to grow loan by 6.45%; Union Bank would need 10.53% loan growth; Zenith Bank would have to grow loan by 10.6%; UBA would need to grow its loan by 10.88%; Stanbic IBTC Holdings would need
14.14% loan growth and Unity Bank would need a loan growth of 47.25%.
A few financial experts however are of the opinion that the September timeline may be too short for non-compliant banks given the unfavorable macroeconomic environment that may force the central bank of Nigeria to extend the current timeline.