New Nigerian bank lending policy may disappoint

Subject

Nigerian banking innovations.

Significance

After complaints over the slow growth of commercial bank lending specifically to preferred sectors, the Central Bank of Nigeria (CBN) recently proposed a range of new policy measures. This includes a new minimum loan-to-deposit ratio (LDR) target of 60% for all commercial banks, and that loans extended to small and medium-sized enterprises (SMEs), retail, mortgage and consumer lending be weighted at 150%. Banks are required to conform to the new requirements by September 30.

Impacts

• Liquidity outflows from banks that opt to drop expensive deposits may lead to pressure on the naira.
• The interplay of the new LDR policy and CBN Treasury Bills' maturities will prompt uncertainty in currency and debt markets.
• Newly created banks are even more unlikely to be able to expand their loan book quickly enough to meet the new requirements.