Why this analyst thinks the CBN’s imposition of minimum loan to deposit ratio on banks is negative

The Central Bank of Nigeria's recent announcement of the imposition of a minimum loan to deposit ratio on banks has stirred conversations and debates within the financial sector. Ronak Ghadia, Director and Sub-Saharan Africa Banking Analyst at EFG Hermes Research, shared his insights on CNBC Africa regarding the potential impacts of this mandate and other reforms in the Nigerian banking industry. Ghadia expressed concerns about the CBN's decision, stating that the imposition of a minimum loan to deposit ratio could have negative consequences. He highlighted that this directive might compel banks to take on more risks in an already fragile economic environment. Ghadia further elaborated that such a move could lead to a relaxation of underwriting standards, potentially resulting in a deterioration of asset quality. This situation is particularly concerning as many banks in Nigeria have experienced a significant weakening of their capital adequacy ratios since the 2015-2018 crisis. Moreover, Ghadia pointed out that the central bank's focus on increasing lending to the real sector might be misdirected. He argued that the reluctance of banks to lend is not solely due to a lack of regulatory mandates but rather stems from various underlying issues. One key factor contributing to banks' hesitation to lend is the higher yields offered by the T-bill market, which presents a more attractive investment option for financial institutions. Additionally, the overall economic weakness, regulatory volatility, and onerous regulatory burdens further deter banks from engaging in increased lending activities. In discussing potential solutions for stimulating growth in the banking sector, Ghadia emphasized the importance of banks embracing innovation and creativity. He commended the initiatives taken by banks in the past few years, particularly in driving financial inclusion through biometric registration and expanding the reach of the SANF network. Ghadia suggested that as banks gather more data on their customers and leverage technological advancements, they can identify new avenues for growth and enhance their lending practices. Overall, the Nigerian banking sector faces a complex landscape characterized by regulatory challenges, economic uncertainties, and the need for strategic transformation. As the CBN continues to implement reforms and directives to drive lending and economic growth, industry players like banks and analysts must navigate these changes thoughtfully and adapt their strategies to thrive in the evolving financial landscape.