Nigerian banks’ balance sheets may weaken, IMF warns

The International Monetary Fund has said the directive from the Central Bank of Nigeria that deposit money banks should achieve a minimum loan-to-deposit ratio could weaken their balance sheets.

The CBN, in a circular dated July 3, 2019, mandated all DMBs to maintain a minimum loan-to-deposit ratio of 60 per cent by September 30, 2019 in a bid to improve lending to the real sector of the nation’s economy.

The minimum LDR was in October reviewed to 65 per cent, which is to be attained by December 31, 2019.

The apex bank said failure to meet the minimum LDR would result in a levy of additional cash reserve requirement equal to 50 per cent of the lending shortfall of the target LDR.

The CRR is the share of a bank’s total customer deposit that must be kept with the CBN in the form of liquid cash. It is currently at 22.5 per cent.

“Nigeria introduced a requirement for banks to achieve a minimum loan-to-deposit ratio, which could significantly weaken banks’ balance sheets and lower the cost of funds (as banks could quote low rates to curtail new deposits),” the IMF said in its latest Regional Economic Outlook for sub-Saharan Africa.

The Mission Chief and Senior Resident Representative for Nigeria, IMF, Amine Mati, at the pubic presentation of the report in Lagos on Wednesday, said the fund was of the view that the regulation might need to be revisited in terms of the potential pressure on non-performing loans.

According to the report, Nigeria is projected to grow at 2.5 per cent in 2020, up from 2.3 per cent in 2019, driven by both oil and non-oil sectors.

“Medium-term growth is projected at slightly higher than 2.5 per cent, implying no progress in per capita growth. This low growth is driven by insufficient policy adjustment, a large infrastructure gap, low private investment, and banking sector vulnerabilities,” the Washington-based fund said.

It said since 2016, revenue in sub-Saharan Africa had risen by only 0.2 per cent of the GDP a year on average, although countries had room to mobilise, on average, between three per cent and five per cent of the GDP in revenue.

The IMF noted that Nigeria continued to have low tax rates, narrow tax bases and broad exemptions.

It said, “In several countries, tax administrative capacities remain weak, and governance is a concern. Also, the informal sector is large in many countries (such as Angola, Central African Republic, Chad, Guinea and Nigeria), resulting in low tax compliance,” it said.

“Mobilising more domestic revenue requires improving tax administration (such as assigning tax identification numbers for commercial importers, improving land registries, and strengthening tax audit functions, customs administration, and compliance management of large taxpayers) and reforms to broaden revenue bases, including through fewer exemptions.”


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