Credit to Private Sector Drops by N519.5bn YtD Amid Unstable FX, Inflation

Kayode Tokede

Amid spiralling inflation rate and unstable naira at the foreign exchange,which impacted on business activities in the country, credit to the private sector (CPS) declined by N519.5billion Year-to-Date (YtD), data released by the Central Bank of Nigeria (CBN) has shown.

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 the national economic agenda.

According to the ‘Money and Credit Statistics’ of the CBN, the financial sector CPS as of November 2024 stood at N75.96 trillion, about 0.68 per cent or N519.5billion decline from N76.48 trillion in January 2024.

CPS in 2023 had closed at N62.54 trillion, representing an increase of 50.5 per cent or N20.99 trillion from N41.52 trillion January 2023.

The latest data on CPS obtained from the CBN indicated that banks’ loans and other facilities to the private sector increased to N75.96 trillion as of November 2024, about 2.55 per cent or N1.89 trillion increase from N74.07 trillion reported in October 2024. 

The N1.89 trillion CPS increase MoM in November 2024, however, is a reflection of resilience and support of the banking sector to the economy.

The CBN statistics showed 43.72 per cent or N18.166 trillion YoY increase in CPS from N41.53 trillion in November 2023 to N59.69 trillion in November 2024.

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

According to a report by the National Bureau of Statistics (NBS), inflation increased from 28.20 per cent November 2023 to 34.60 per cent as of November 2024.

Also, the naira has depreciated to N1,663.4 against the dollar when compared to N942.12 against the dollar November 2023.  

Experts said that the reported N75.96 trillion CPS in November 2024 is on the backdrop of the weakening of the naira at the foreign exchange market and 34.60 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.

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

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 had 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).

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 report stated.

Commenting, 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.

Recently, the CBN Governor, Dr. Olayemi Cardoso said 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.