Banks Extend N2.29tn Credit to Private Sector Amid Inflation Rate

Kayode Tokede

In a move that indicates continued support for the nation’s economic growth, banks Credit to Private Sector increased by N2.29 trillion between June and July 2024, the Central Bank of Nigeria (CBN) has said.

The additional N2.29 trillion credit is coming on the backdrop of unstable naira at the foreign exchange market and double-digit inflation rate.

The CBN in its Money and Credit statistics report credit to the private sector increased by 34 per cent from N56.46 trillion in July 2023 to N75.5 trillion in July 2024.

The CBN numbers indicated that banks’ loans and other facilities to the private sector have increased by nearly a third, underlying the resilience and support of the banking sector to the economy.

The report showed that CPS rose by 33.7 per cent to N75.48 trillion in July 2024 as against N56.46 trillion recorded in July 2023, an increase of N19.02 trillion.

A breakdown indicated that credit to private sector increased by 3.1 per cent or N2.29 trillion to N75.48 trillion in July 2024 compared with N73.19 trillion in June 2024.

The CPS includes loans, trade credits and other account receivables and supports provided by banks to the private sector within a period. The CPS is a global measure of the banking sector’s balance sheet resilience and contribution to national economic agenda.

The latest report underlined the continuing growth in banks’ operations and deployment of funds to the productive sector of the economy.

The report showed that Nigerian banks had seen significant increase in deposits during the first half of this year. The report indicated that banks’ demand deposits rose from N26.7 trillion recorded at the end of December 2023 to N33.0 trillion by June 2024.

Banks had sustained steady growth in deposits across the quarters as total demand deposits in the first quarter ended March 2024 increased by 8.1 per cent to N28.9 trillion. In the second quarter ended June 2024, banks’ deposits increased by 14.3 per cent to N33 trillion.

Analysts believe bank are lending to big corporations to enable them meet the 65 per cent Loan-to-Deposit Ratio (LDR) threshold set by the CBN.

They said banks are in position to continue to create more loans, citing aggressive growth strategies by banks and enabling regulatory environment.

In a related development, a recent report on capital importation into the country had also shown that banks attracted nearly two-third of capital importation into the country.

Analysts said this was a measure of confidence in the Nigerian banks as foreign investors gradually take more active stance in the nation’s economy.

Analysts agreed that increase private sector credit implies a major boost for the economy as there is a link between credit to the private sector and the economic growth. Several studies have continuously found that increased lending by banks directly leads to increase in Gross Domestic Products (GDP).

Commenting, analysts at Cordros Capital said the trend in credit to private sector may continue in the period ahead.

“We believe the re-enforcement of the CBN’s limit on Deposit Money Bank’s loans-to-deposits macro-prudential ratio will continue to drive the willingness of commercial banks to create risky assets over the short to medium term,” Cordros Capital stated.

The analysts however, noted that the apex bank’s intensified monetary policy tightening measures could tether the magnitude of growth going forward.

A study published by the CBN concluded that, “credit is growth-enhancing, even when trade openness, monetary policy, investment climate and infrastructure are low.” The study found that private sector credit increases economic growth.

The balance sheet strength of banks also determine the flow of credits, with the continuing increase in lending amidst macroeconomic headwinds underpinning Nigerian banks’ resilience and stability.

In a study on ‘Balance Sheet Strength and Bank Lending During the Global Financial Crisis’, researchers at International Monetary Fund (IMF) examined the role of bank balance sheet strength in the transmission of financial sector shocks to the real economy.

The study found that, “banks with strong balance sheets were better able to maintain lending during the crisis.”

According to the study, banks that were ex-ante more dependent on market funding and had lower structural liquidity reduced the supply of credit more than other banks.

“However, higher and better-quality capital mitigated this effect. Our results suggest that strong bank balance sheets are key for the recovery of credit following crises, and provide support for regulatory proposals under the Basel III framework,” IMF stated.

Managing Director, Arthur Steven Asset Management, Mr Olatunde Amolegbe, said the growth in credit to the private sector could be attributable to increase in economic activity.

He however pointed out that other factors such as inflation and devaluation could moderate such increase

However, the Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said the credit outlook remains cautious, calling for expansive distribution of credits across all tiers of companies and sectors.

According to him, there are major concerns in terms of distribution of credits across sectors and companies with small businesses, which contribute more to job creation and economic inclusion, not likely to benefit much.

He noted that banks tend to be wary of credit risk concerns associated with lending to small businesses and certain sectors, adding that efforts should be made to drive inclusive and stable credit access to all sectors including growth and employment elastic sectors such as agriculture, manufacturing, real estate, mining and construction among others.

But the CBN Governor, Dr. Olayemi Cardoso, believe the ongoing recapitalisation would strengthen banks further to drive the $1 trillion national economic target and support stable growth in the economy.

According to him, additional capital would not only provide a substantial buffer for banks against potential economic challenges, but enhance Nigeria’s banks capability to support massive economic growth and play competitively globally.