FX Volatility Pushes Customers to Borrow More as Banks’ Exposure Hits N63.86tn

Kayode Tokede

Following the rush by bank customers for more money to fund their foreign exchange commitments, Nigerian banks’ exposure to their customers has continued to swell, reaching a new high in the first half of this year.

This is despite severe competition with Fintech companies, among other factors.

Analysis of half year financials submitted to the Nigeria Exchange Limited (NGX), showed that jus 11 Deposit Money Banks (DMBs) operating in Nigeria and other African countries granted an estimated N63.86 trillion loans to customers as of half year ended June 30,2024.

The N63.86 trillion loan to customers in the period under review is about N16.5 trillion or 34.8 per cent increase over the N47.36 trillion reported in the corresponding period of 2023.  

The growth in DMBs lending to customers can also be attributed to tightening by  monetary authorities in key African economies to address stubbornly high inflation rate, rising debt profiles, expansion in Fintech companies lending to customers, among others.

The monetary tightening in Nigeria has led to Monetary Policy Rate (MPR) or interest rate hike to 27.25 per cent, a 850 basis points increase from 18.75 per cent in 2023 end.

THISDAY analysis of the 11 DMBs financial statements showed that Ecobank, followed by Access Holdings Plc and Zenith Bank Plc are the top three lenders to customers as of June 30, 2024.

In the period under review, Ecobank reported N14.35 trillion loans to customers as of June 30, 2024, about 43 per cent increase from N10.03 trillion reported in 2023FY, while Access Holdings announced N10.84 trillion loans to customers as of June 30, 2024, representing an increase of 34.8 per cent from N8.04 trillion reported in 2023FY.

Zenith bank reported N9.29 trillion loans to customers as of June 30, 2024, about 42 per cent increase from N6.56 trillion declared in 2023 FY.

The management of Zenith bank stated the growth was aided by loans disbursements to customers and the translation effect of foreign currency denominated loans.

Also, the management of Access Holdings added that the gross loans of N12.3 trillion (loans to customers and banks) was from organic loan growth and the impact of foreign currency-denominated loans.

These DMBs have played critical role in lending to manufacturing, Oil & Gas, Agriculture, education and even lending to government in African countries where they have branches. 

According to Central Bank of Nigeria (CBN), credit to private sector as of June 30, 2024 stood at N73.19 trillion, a 38.6per cent or N20.38 trillion Year-on-Year growth from N52.8 trillion reported in June 2023., driven by massive lending to critical real sectors such as oil & gas and manufacturing sectors.

Analysts said the reported N73.19 trillion credit to private sector as of  June 2024 is on the backdrop of the weakening of the naira at the foreign exchange market and over 30 per cent inflation rate, stressing that bank customers were lending to big corporations to meet the 65 per cent Loan-to-Deposit Ratio (LDR) threshold of the CBN.

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.

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

The CBN had in a recent circular stated that it would resume the enforcement of the LDR policy effective July 31, 2023.

Despite increasing lending by these DMBs, analysts have raised concerns over raising MPR that has impacted on average maximum lending and prime lending to banks customers. 

With the raising MPR, the banking sector average maximum lending rate closed June 2024 at 29.11 per cent from 28.94 per cent reported by the CBN June 2023, while average prime lending moved from 13.85 per cent June 2023 to 15.85 per cent June 2024. 

However, the steep increase in the policy rate has sparked concerns regarding the potential impact on the cost of credit for businesses already facing economic hardships.

Each bank offers different lending rates that reflect their respective approaches to lending to the manufacturing sector in Nigeria.

In Nigeria, large corporations perceived as having lesser risk with a history of generating consistent cash flows are offered prime lending rates, while small businesses and individuals perceived as having higher risk typically fall above the prime lending rate margin.

Analysts have attributed the increase in lending to the hike in MPR, weaken of local currency at the foreign exchange.

The recent announcement, made by CBN Governor, Dr. Yemi Cardoso, had highlighted the central bank’s proactive approach towards monetary tightening amidst challenging economic conditions.

The rate hike will slow economic growth and reduce consumer spending, according to analysts at FBN Quest.

“Ultimately, the impact on the general economy could be a potential slowdown in economic growth, with consumer spending suppressed, and a decrease in business investments,” FBN Quest said in a recent note.

Director/Chief Executive Officer · Centre for the Promotion of Private Enterprise (CPPE), Mr Muda Yusuf explained that bank customers now need more money to fund their foreign exchange commitments, leading to increasing loan demands.

According to him, “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 has forced some customers to borrow more from banks.”