Given that Nigeria’s banks are some of the most reluctant lenders in major emerging markets, with an average loan-to-deposit ratio below 60% in comparison to 78% across Africa, 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. 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 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.
Curiously,
statistics have shown that in developing economies, the key to
socio-economic growth is access to finance, but the challenge is to increase
loans to individuals and SMEs without suffering the fall-out of bad debt.
In a statement from Apo Group and made
available to OpenLife, the Director General, Lagos Chamber of Commerce
and Industry (LCCI), Mr. Muda Yusuf, had stated that the greatest challenge
business operators in the country have been facing over the years
was access to credit, which he said had resulted to huge financing gaps.
In order to expedite this Loan to Deposit Radio, new digital banks and
progressive lending institutions in emerging economies are looking at using
technology to expedite the process, such as digital scoring methods based on
Artificial Intelligence and Machine Learning, where smartphone device metadata
solutions, such as offered by CredoLab and other providers, is used to assess
credit-worthiness instead of traditional methods.
Tarun Kumar Kalra, Global Head of Sales at CredoLab cited a successful example
in Indonesia, which has one of the largest pool of unbanked customers in the
world. One of the top 10 Indonesian banks serving over 2 million customers
wanted to leverage the opportunities in this pool of unbanked customers. The
bank had a comprehensive array of products and services being delivered through
physical branches, mobile and web banking.
The bank’s mandate was to increase the number of loans it disbursed to the
new-to-bank (NTB) customers by using an underwriting process that was fair to
the applicants and yet highly predictable of their behaviour,” he said.
There were several challenges, such as increasing approval rates, 85% of the
applicants being rejected and the low predictability of existing underwriting
process,” he added. “The bank solved this problem by introducing digital
scorecards based on smartphone device data, which led to a +107% approval
rate, a user adoption of 61% and an average of 5 seconds to approve the
application.”
Kalra said that what’s noteworthy in the deployment of this solution was the
short period of 2 weeks that it took for the bank to implement the new credit
scoring system, as there were no development time or costs, while at the same
time meeting local data security and privacy laws and regulations.
Asked about the uptake of digital smartphone metadata credit scoring
methodology, Kalra responded that over 61 lending institutions have adopted
CredoLab’s technology across emerging economies in the Asia Pacific region.
“With our launch into Africa, specifically in South Africa, Nigeria and Kenya
last year, we already have 3 major traditional and digital banks leveraging the
technology in South Africa. Financial institutions in Nigeria and Kenya are
investigating this technology as a secure and sustainable way of expanding
credit into the unbanked markets, and raising banks’ Loan to Deposit Ratio while
minimising risk,” he concluded.
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