Most Nigerian banks cannot meet the 65% LDR (loan to deposit ratio) which the central bank has set. They have less than 10 weeks to close the gap. As I look at the data, I am beginning to think that some lending startups could be on play: Acquisition. Why? Bank stocks are rallying and if that stays, banks would have momentum to shop! The alternative of rejecting deposits makes no sense.
The Central Bank of Nigeria (CBN) increased the minimum loan-to-deposit ratio (LDR) of commercial banks from 60 percent to 65 per cent in the latter part of 2019. According to a Bloomberg report, the measure was among a raft of regulations aimed at forcing banks to boost credit, mainly to farmers, small-and-medium-size businesses and consumers.
The loan-to-deposit ratio (LDR) is used to assess a bank’s liquidity by comparing a bank’s total loans to its total deposits for the same period. The LDR is expressed as a percentage. If the ratio is too high, it means that the bank may not have enough liquidity to cover any unforeseen fund requirements. Conversely, if the ratio is too low, the bank may not be earning as much as it could be earning.
According to the report, Nigeria’s banks are some of the most reluctant lenders in major emerging markets, with an average loan-to-deposit ratio below 60%. That compares with 78% across Africa, according to data compiled by Bloomberg, with 90% in South Africa and about 76% in Kenya. Compare this with developed markets such as the UK, which according to Statista.com, states that Shawbrook Bank’s loan to deposits ratio on the British market between 2012 and 2016 increased from 74 percent in 2012 to 102.7 percent as of 2016.
Sure, the big lending startups may be expensive to absorb. The smaller ones may not have enough user base to justify acquisition. Yet, the banks could be attracted to their technologies as some of the low-tier banks have really nothing for retail lending. Using the technologies and the brands, they could ramp up to meet CBN target. I do think acquisitions and acqui-hire in the neighborhood of $7 million would trigger great Easter and Sallah for some of the mid-tier startups. Yet, CBN can postpone the date when the banks lobby for more time! This is Nigeria, after all.