Moody’s says CBN’s new lending rule credit-negative for Nigerian banks

The Central Bank of Nigeria’s directive requiring banks to maintain a minimum loan-to-deposit ratio (LDR) of 60% by the end of September 2019 is credit negative as although it doesn’t tighten their funding positions, it will force some banks to take out potentially riskier loans to meet the minimum LDR,” Moody’s analyst, Peter Mushangwe, said in a note on Monday.

This is coming on the July 3 directive from the Central Bank of Nigeria (CBN) requiring banks to increase lending in the country or be penalized by packing 50 percent of their lending shortfall with the regulator.

The CBN said it wants lenders to focus on Small and Medium scale Enterprises (SME), retail, mortgage and consumer lending in particular; and assigned a weight of 150 percent to these segments when computing banks’ LDRs for the 60 per cent target.

Moody’s sees the directive potentially increasing cost of funding for banks as additional cash reserve requirements are seen likely intensifying competition for deposits.

United Bank for Africa  (UBA) and Union Bank are seen by Moody’s as the most affected because their LDRs were lower than 60 percent as at 2018 year-end.