By CSL Stockbrokers
In July 2019, the Central Bank of Nigeria (CBN) announced an increase
in the required minimum Loan-Deposit Ratio (LDR) to 60% effective end
of September 2019. Upon review of the results of the policy, the CBN
decided to raise the ratio higher to 65.0% which banks were expected to
comply with by the end of December 2019. The CBN in coming up with the
policy sought to trigger growth in a
weak economy. That said, we seek to
examine the impacts of the policy on the overall economy after over a
year of implementation.
First, we examine credit growth in the economy since the minimum LDR
policy was communicated. According to data sourced from the Nigerian
Bureau of Statistics (NBS), aggregate banking sector credit to the
economy stood at N18.8tn at the end of Q2 2020 which represents an
increase of 15.8% from the aggregate banking sector credit of N16.3tn at
the end of Q3 2019 before the minimum LDR was raised to 65.0%. Much
more impressive is the 24.4% growth in aggregate banking sector credit
when compared with the total of N15.1tn at the end of Q2 2019 before the
minimum LDR of 60.0% was announced. This compares with a deccline of
2.3% and 3.9% in aggregate banking sector credit in 2017 and 2018. Thus,
on the credit growth front, it can be said that the CBN has been
successful at
driving credit growth.
Next, we examine the impact of the policy on borrowing costs in the
economy. We believe many corporates moved to refinance their expensive
loans following the steep decline in borrowing costs. We note that this
was evident in the financial performance of deposit money banks as many
reported steep declines in cost of funds. In addition, we note that
several corporates have taken advantage of the lower borrowing costs to
raise cheap financing (long term & short term) from the debt capital
markets. For example, corporates like Flour Mills, Nigerian Breweries
and Dangote Cement have all raised funding via commercial papers at low
and mid-single digits in 2020. That said, we note that the LDR policy
was not the sole driver of the decline in borrowing costs but it was one
of many policy levers implemented by a dovish CBN.
Lastly, we think the CBN’s overriding objective was to trigger
accelerated recovery in economic growth. However, we retain our view
that a fiat-driven strategy may not be sufficient to accelerate economic
growth given the presence of many structural challenges. That said, the
advent of covid-19 and its economic challenges makes it difficult to
measure the real impact of the LDR policy on economic growth.
Nevertheless, we note that GDP growth in Q1 2020 (before Nigeria began
feeling the full impact of the covid-19 crises) slowed to 1.87% compared
to the 2.12% before the 60.0% LDR policy was announced and 2.28% after
it was raised to 65.0%.
CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary
of FCMB Group Plc and is regulated by the Securities and Exchange
Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.
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