Credit to Private Sector Up 66% to N74.31tn YoY on Weak Naira, Inflation

Kayode Tokede

Following the massive devaluation of the naira against the US dollar and spiralling inflation, banks credit to the private sector grew by N29.5 trillion or 66 per cent Year-on-Year (YoY) to N74.31 trillion as of May 2024 from N44.79 trillion the same period in 2023.

Analysts believe the drive by bank customers for more money to fund their foreign exchange commitments as a result of naira devaluation and galloping inflation have been major contributing factors.

According to “Money and Credit Statistics” released by the Central Bank of Nigeria (CBN), credit to private sector grew by N1.4 trillion or 1.9 per cent  Month-on-Month (MoM) to N74.3 trillion from N72.92 trillion reported in April 2024.

Analysts said bank are lending to big corporations to meet the 65 per cent Loan-to-Deposit Ratio (LDR) threshold of the CBN, among other factors.

Between June 2023, when the foreign exchange market was liberalized, and mid-February 2024, the naira depreciated by 69 per cent, leading to a considerable rise in import costs, which significantly impacted Nigeria’s import-dependent economy.

The CBN had updated its Cash Reserve Requirement (CRR) mechanism, making banks with minimum LDR below requirement to face a 50 per cent lending shortfall. The policy was set to improve lending to customers to stimulate the real sector of the economy.

It implies that for every N100 received as deposits, the banks are to lend N65 to customers.

Meanwhile, the CBN data showed that credit to the government dropped by N2.34 trillion or 7.661 per cent YoY to N28.38 trillion as of May 2024 from N30.71 trillion May 2023.   

Not withstanding, the Debt Management Office (DMO) in its latest report disclosed that disclosed that total public debt rose to N121.67 trillion in Q1 2024   from N97.34 trillion in Q4 2023, reflecting an increase of N24.33 trillion.

This trend is projected to persist, according to analysts at Cowry Asset Management Limited. 

Accprding to them, “Cowry Research foresees no immediate relief for Nigeria’s debt levels and debt service costs. Given the government’s activities in the domestic capital market so far in 2024, it is anticipated that approximately N3 trillion will be raised from subsequent FGN Bond issuances.”

Cowry Asset expressed concern about the ongoing fiscal challenges faced by state governments.

They noted that the challenges are due to low revenue as against increased expenditure and   debt servicing.

They added: “The lower revenue distributions experienced relative to their total expenditure underscore the inadequacy of available funds, especially amidst efforts to mitigate the effects of the country’s rising cost of living and fiscal pressure. This pressure is primarily driven by the relentless growth in expenditure profiles and the weighty burden of servicing existing debts.”

Speaking with THISDAY, the Director/Chief Executive Officer · Centre for the Promotion of Private Enterprise (CPPE), Mr Muda Yusuf blamed weak naira and inflation for the increase in credit to private sector.

He said, “If those in the private sector does not have the needed funds, it means they will have to borrow from banks to support their business obligations. The volatility in the foreign exchange market has forced some customers to borrow more from banks and it is responsible for N29.5 trillion credit to private between May 2023 and May 2024.”

Commenting also, the Vice President, Highcap Securitas Limited, Mr. David Adnori also alluded the growth to depreciation of the naira, stressing that a lot of big corporates have to access funds from the banks in a move to meet the supply of their inputs.

According to him, “It is obvious that credit to the private sector is expected to increase in January amid macroeconomy challenges. The weakening of the local currency has given more room to borrow from banks.”

In addition, the Head, Financial Institutions Ratings at Agusto & Co, Mr. Ayokunle Olubunmi attributed the growth of credit to private sector in May 2023 and May 2024 to the devaluation of the naira and CBN’s LDR policy.

“Between December 2023 and January 2024, we witnessed a significant fall in Naira. If you look at credit to private sector in naira terms, the dollar exposure could have been included.

“In Q3 2023, banks were trying to increase their lending to real sector in a move to boost their LDR and ultimately reduced the amount of debit they will be getting from CBN as penalty. After the election in 2023, banks understand the economy better which makes it easy for banks to grant credit. All these impacted credit to private sector,” Olubunmi said. He added that the credit to private sector is expected to increase further in 2024.