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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.

Author Bio

The Authors are staff of the Central Bank of Nigeria

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.

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