Economic and Financial Review
Publisher
Central Bank of Nigeria
Keywords
Loan-to-deposit ratio, Bank liquidity, Inflation
Abstract
The study measures the impact of loan to deposit ratio (LDR) on Banks' liquidity in Nigeria between 2000Q1 and 2019Q3. The paper applied the Factor-Augmented Vector Autoregressive (FAVAR-X) methodology for estimation and forecasting. The result suggests that an LDR of 70.0 per cent, which reduces Banks' liquidity from N187.95 billion in 2019Q4, through N153.09 billion in 2020Q2 to close at N135.15 billion in 2020Q4, may require cautious acceptance. Thus, increasing LDR beyond 70.0 per cent may impact Banks' liquidity negatively. Furthermore, a direct relationship is established between LDR and inflation. The findings conform to a priori expectations as higher LDRs translate to increases in lending by Banks' which could boost output and ultimately cause a spike in inflation. The study emphasises the importance of caution by not increasing the LDR above 70.0 per cent, as this could cause excessive credit growth, increased inflation, and erosion of Banks' liquidity.
Publication Title
Economic and Financial Review (EFR)
Issue
2
Volume
59
First Page
43
Last Page
59
Classification-JEL
C01, E5, E31
Recommended Citation
Adenuga, A. O., Mohammed, J. A., Laniyan, C. V., Akintola, A. A & Asuzu, O. C (2021) Measuring the Impact of Loan-to Deposit Ratio (LDR) on Banks' Liquidity in Nigeria, CBN Economic and Financial Review (EFR), 59(2), 43-59.