Nigerian banks’ credit extensions to the private sector and other monetary aggregates have continued to expand in recent months despite the efforts of the Central Bank of Nigeria (CBN) to tighten monetary policy to rein in inflation.
Credit to the private sector by banks rose by 17.52 percent year-on-year (y/y) to N41.58 trillion in November 2022, up from N35.38 trillion recorded in the corresponding period of November 2021, data from the CBN showed.
According to the data by Nigeria’s Central Bank, private sector credit extension (PSCE) increased by 18 percent y/y to N40.8 trillion as at the end of October 2022, down from a growth rate of 19 percent y/y in September.
The data covers lending by the entire banking system and not only the Deposit Money Banks (DMBs), which account for almost 69 percent of the total figure, said FBNQuest in a report.
The data reflect lending by the CBN and state-owned development banks, such as the Bank of Industry (BoI), and smaller credit extensions by other banks, such as micro-finance banks and non-interest banks. Although credit extension to the private sector has grown over recent months, Nigeria’s credit penetration still has a long way to go, considering the low level of formal and informal financial inclusion in Nigeria and the CBN’s target of 95 percent financial inclusion by 2024.
According to a narrower measure of PSCE obtained from the CBN’s Quarterly Statistical Bulletin (QSB) for the first quarter (Q1) of 2022, total PSCE reached N28.2 trillion as at the end of September 2022, implying an increase of 23.7 percent y/y. This series covers only lending by DMBs.
This leaves a difference of around N17 trillion (between total PSCE and lending by DMBS), a little which can be attributed to the time lag, the report stated.
“Credit growth of the government continues to exceed all other monetary aggregates that we track,” analysts at FBNQuest noted.
The latest data for October shows that credit extension to the government expanded by 75 percent y/y, following a 76 percent growth in September.
According to reports, the CBN’s loans to the Federal Government via ways and means amounted to N23.8 trillion as at the end of October 2022.
“As a result, we can conclude that the government’s access to credit is crowding out lending to the private sector. The high rate of credit extension to the government is likely to continue, due to the increasing government’s fiscal deficits. The 2023 (approved budget) implies a fiscal deficit of about N11.0 trillion, which is higher than the revised N8.2 trillion in the 2022 budget.
The banking industry began and ended the year with macroeconomic headwinds, like high inflation rate, tight monetary policy rate (interest rate) and foreign exchange (FX) pressure but the sector remained resilient.
Inflation rate which affects the purchasing power of banks’ customers and their ability to save, started the year at 15.60 percent (January) rose by 5.87 basis points to 21.47 percent in November 2022, and is projected to rise further in December, according to members of the Monetary Policy Committee (MPC).
Benchmark interest rates increased by 500 basis points to 16.5 percent at the end of 2022 from 11.5 percent at the beginning of the year in January 2022, data from the CBN showed.
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At the last MPC meeting in November 2022, the CBN raised its benchmark interest rate, known as Monetary Policy Rate (MPR) by 100 basis points to 16. 5 percent, the fourth straight hike in 2022.
On September 27, 2022, the Central Bank also raised the Cash Reserve Ratio (CRR) to 32.5 percent from 27.5 percent, which it had stood since January 2020, to reduce monetary-induced inflation.
“Early in 2022 the official CRR stood at 27.5 percent (i.e. 27.5% of deposits need to be banked with the CBN) but it was widely acknowledged that the effective CRR debit was over 50.0 percent for many banks,” analysts at Coronation research said.
Many banks found themselves short of liquidity and successive rises in the MPR made it more and more expensive to refinance with the Central Bank. As MPR rate hikes translated into market interest rates, the effect of CRR debits was to make banks look for cash, and the results were deposit rates offered comfortably above Treasury bill rates.
Managers of money market mutual funds, which can invest a proportion of their assets under management in bank deposits, were able to pass on benefits to their clients, a report from Coronation stated.
