The loan-to-deposit ratio (LDR) of Nigeria’s commercial banks averaged 63.51 per cent between January to August 2022. Simply put, deposit banks in Africa’s biggest economy gave out 63.51 per cent in loans of all the deposits they received this year.
Nigeria’s minimum loan-to-deposit ratio is set at 65%. The Central Bank of Nigeria (CBN) increased its minimum ratio from 57% in 2019 to 65% in 2021.
By this figure, deposit banks in the country are lending below the minimum ratio.
Distribution Company (DisCo) Revenues Dropped by 7.97% in Q2 2022
A loan-to-deposit ratio measures liquidity by comparing a bank’s total loan credit facilities to its deposit. A high ratio means a bank might have little cash to meet unforeseen demands, while a low ratio may mean low earnings.
According to Investopedia, a loan-to-deposit ratio of 80 per cent to 90 per cent is ideal for the bank to ensure profitability and meet customers’ demands.
The last time deposit banks in Nigeria hit this ideal situation was in October 2016, when the ratio was 81.05 per cent. After this period, the ratio dropped to 80.47 per cent in November, then increased marginally to 80.53 per cent in December 2016.
The loan-to-deposit ratio dropped after that before peaking at 82.77 per cent in October 2017.
Since November 2017, its movement has been unsteady, going down and up, then down again. It was 76.8 per cent at the end of 2017 but dropped to 65.04 per cent by the end of 2018.
At the end of 2019, 2020, and 2021, the loan-to-deposit ratios were 62.87%, 59.37%, and 62.17%, respectively.
Although the ideal ratio is between 80% to 90%, it varies from country to country. The minimum ratio is 91% in South Africa, 70% in Brazil, 75% in India, 76% in Kenya and 65% in Nigeria.
A high loan-to-deposit ratio shows the bank’s ability to attract customers. If the bank’s deposit increases through increasing clients, it will have more money to lend out, increasing its profitability and attracting more investors.
As more of its cash is loaned out, the bank might be in a difficult liquidity position and need more cash to meet its obligations to customers on demand. The ideal loan-to-liquidity ratio is a balance that ensures banks can make money available to borrowers and meet their financial obligations.
Get real time update about this post categories directly on your device, subscribe now.
Comments 1