The recent economic report for the second quarter of 2023 by the Central Bank of Nigeria (CBN) highlights a noteworthy borrowing trend among Nigerians, amounting to approximately N290 billion from banks. Consumer credit, which includes personal and retail loans, witnessed a substantial 12.2% increase, rising from N2.35 trillion in Q1 2023 to N2.64 trillion in Q2 2023—an increase of N290 billion from April to June.

Breaking down the total consumer credit of N2.64 trillion as of June 2023, personal loans constituted the majority at N1.92 trillion (72.9%), while retail loans made up N715.10 billion (27.1%). According to the CBN economic report, this surge in consumer credit is due to heightened demand for personal loans and the reinforced implementation of the Loan-to-Deposit Ratio (LDR) policy. Consequently, total consumer credit experienced a substantial 12.2% increase, reaching ₦2,637.31 billion in Q2 2023, compared to ₦2,349.88 billion in the preceding quarter.

The CBN report underscores that the increase in consumer credit is primarily a result of increased demand for personal loans and the robust enforcement of the Loan-to-Deposit Ratio (LDR) policy. In July, the CBN announced the resumption of strict enforcement of the LDR policy, initially introduced on January 7, 2020, requiring banks to maintain a minimum LDR of 65%.

The Loan-to-Deposit Ratio (LDR) is a crucial metric measuring a bank’s liquidity abilities, especially in adverse market conditions. The LDR policy strategically regulates the proportion of a bank’s deposits allocated to productive lending rather than being held in low-yield assets.

The components of the LDR policy include mandatory lending quotas, obliging banks to maintain a specified minimum percentage of total deposits as loans to the real sector fostering economic activities such as agriculture, manufacturing, and small and medium-sized enterprises (SMEs). The policy is reinforced through a system of penalties and incentives, encouraging compliance and active participation by banks in driving economic development.

The apex bank initially mandated a minimum Loan-to-Funding Ratio (LDR) of 60.0% on July 3, 2019, subsequently raising it to 65.0% on September 30, 2019. This measure aims to incentivize banks to enhance lending in consumer, mortgage, and corporate sectors, promoting economic growth.

The LDR policy facilitates access to credit for businesses, particularly SMEs, fostering entrepreneurship and job creation. It directs funds towards key sectors, diversifying the economy beyond traditional banking activities. It is also a risk mitigation strategy, promoting responsible lending practices and safeguarding depositors’ funds while maintaining banking sector stability.

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