CBN Verifies Loan Deposit Ratio Use To Combat Inflation

Femi Onasanya
4 Min Read

Notwithstanding difficulties in the agricultural supply chain, the Central Bank of Nigeria (CBN) has reiterated its belief that the Loan Deposit Ratio (LDR) is an essential instrument for controlling inflationary pressures in Nigeria and has expressed confidence in the strategy’s ability to successfully reduce headline inflation.

 

Reducing the LDR of banks from 65 percent to 50 percent, the CBN intends to create economic stability, highlighting the significance of directing funds into the real sector to stimulate growth.

 

In a recorded podcast titled “Loan to Deposit Ratio Adjustment,” Adetona Adedeji, the acting director of CBN’s banks supervision division, provided an explanation of the reasoning behind this policy modification.

 

“You have to balance what you do with the monetary policy tools and other measures if you want to combat inflation using the orthodox method,” stated Adetona Adedeji, the acting director of CBN’s banking supervision division, in a recorded podcast that was made available on the bank’s website.

 

Adedeji emphasized the connection between the cash reserve ratio, monetary policy rate, and LDR, saying that contractionary measures require raising the cash reserve ratio as well as the monetary policy rate. He contended that lowering the LDR is essential to containing inflation and is consistent with the CBN’s responsibility to preserve price stability in the face of inflationary pressures.

 

Commercial banks are required to follow the specified LDR levels, so long as compliance is continuously evaluated using daily data. Adedeji underscored the importance of the LDR in assessing banks’ ability to lend, their ability to manage risk, and the stability of the financial system.

 

The CBN intends to decrease the money supply by implementing contractionary measures. Additionally, it is the responsibility of the top bank to maintain price stability in an economy that is under pressure from inflation, as Nigeria is right now.

 

The ideal approach is to lower the LDR to ensure that banks’ ability to lend more to the economy and circulate more cash is limited. The apex bank uses a variety of methods to do this, including the option to alter the money supply, he said.

 

He claimed that in an effort to revitalize the economy, the central bank is attempting to fight inflation in a variety of methods. And the central bank is currently acting in just that manner. We will do whatever it takes to combat inflation.

 

Sometimes, the quality of the credit you are able to package matters more than the amount of credit you are able to produce. LDR is one of the indicators used to assess banks’ lending activity, relative to their deposit base, in accordance with the CBN mandate, he said. The central bank is managing the economy through traditional monetary policy.

 

The CBN has a multipronged approach to combating inflation, putting more emphasis on the quality of credit disbursed than on its quantity. Adedeji reaffirmed the CBN’s resolve to fulfill its mandate and promote economic resilience by utilizing traditional monetary policy tools, such as the LDR.

 

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