‘LDR Drives Credit Level, Inadequate to Fast-track Economic Growth’
Analysts at CSL Stockbrokers Limited has maintained view that a fiat-driven strategy may not be sufficient to accelerate economic growth given the presence of many structural challenges.
In its recent note, the firm access the impacts of the Central Bank of Nigeria (CBN) loan as a proportion of deposits policy as successful in driving credit to the economy.
Recall that in July 2019, the 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.
After a year, CSL Stockbrokers examines the impacts of the policy on the overall economy.
The firm review 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%.
It said 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 decline of 2.3% and 3.9% in aggregate banking sector credit in 2017 and 2018.
Thus, on the credit growth front, CSL Stockbrokers said that the CBN has been successful at driving credit growth.
On 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”, analysts explained.
The firm said this was evident in the financial performance of deposit money banks as many reported steep declines in cost of funds.
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In addition, analysts noted 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, it was noted 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.
Meanwhile, the firm thinks the CBN’s overriding objective was to trigger accelerated recovery in economic growth.
However, analysts retain view that a fiat-driven strategy may not be sufficient to accelerate economic growth given the presence of many structural challenges.
It stressed that 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, analysts 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%.
‘LDR Drives Credit Level, Inadequate to Fast-track Economic Growth’
