Nigeria's banks told that 60% of deposits must be used for loans by September
Banks should use at least 60percent of their deposits for loans by the end of September, the central bank said on July 3, according to a circular. Those that don’t will have their cash reserve requirements increased, meaning they’ll be forced to park more money at the central bank.
Nigeria’s banks are some of the most reluctant lenders in major emerging markets, with an average loan-to-deposit ratio below 60percent. That compares with 78percent across Africa, according to data. It is above 90percent in South Africa and about 76percent in Kenya.
The decision was taken “to ramp up growth of the Nigerian economy through investment in the real sector,” Ahmad Abdullahi, director of banking supervision, said in the letter to banks.
“To encourage lending to small businesses and consumers and more mortgages, these sectors shall be assigned a weight of 150percent” when computing the loan-to-deposits ratio. Although there was previously no rule on minimum loan-to-deposit ratios, many Nigerian lenders have a ratio of about 40percent, below the industry average, Abdullahi said.
The order comes after Central Bank governor Godwin Emefiele urged banks to boost lending or have access to risk-free assets restricted.
Speaking at the most recent Monetary Policy Committee meeting in May, he said he would create “a mechanism” to limit banks’ purchases of government securities.
Risk-averse Nigerian banks have resisted lending to businesses and consumers and instead piled their cash into naira bonds, which yield 14.3percent on average, one of the highest rates globally.
Lenders worry that with inflation running at more than 11percent, extending more credit could endanger the financial system through an increase in non-performing loans, or NPLs. That makes some analysts sceptical of whether the new measures will work.