What increasing credit means for private sector in 2023

Due to economic difficulties, political unrest, fuel shortages, and naira devaluation in Q1 2023, economic activities were delayed. Credit to the private sector hit a record high of N43.07 trillion, and as the second quarter progresses, more growth is anticipated for the year.

Four key themes dominated the economy prior to the presidential election in February 2023: the naira redesign policy, excessive inflation, petrol scarcity, and foreign exchange scarcity. In Nigeria, private sector credit climbed to 43066395.01 NGN million in March from 41754414.82 NGN million in February of 2023, according to the first month of the second quarter.

Nigeria Private Sector Credit (1 Year)

Source: BRIU, 2023

Nigeria Private Sector Credit (5Year)

Source: BRIU
The growth rate was somewhat higher than the 3.65 percent increase, or N1.28 trillion, achieved in Q1 2022, according to the Central Bank of Nigeria. Even though the lack of US dollars caused credit growth to decelerate in January and February 2023 and foreign direct investment to decline in 2022, lending to the private sector expanded by 18.1 percent, or N6.6 trillion year-over-year (YoY), from N36.5 trillion in Q1 2022.

In his opening remarks to the Monetary Policy Committee (MPC) at the first meeting of 2023, the CBN’s deputy governor for economic policy, Kingsley Obiora, attributed the rise to the loan to deposit ratio (LDR) directive, which encouraged banks to increase lending to the real economy sector, as well as business competition and strategy as seen in the diagram below.

Source: BRIU

The expansion of credit to the important economic sectors is anticipated to support aggregate demand and foster economic expansion, job creation, and poverty reduction.

Its movement has been erratic since November 2017, travelling up and down before coming back down. By the end of 2018, it had decreased from 76.8% at the end of 2017 to 65.04%. The loan-to-deposit ratios were 62.87%, 59.37%, and 62.17% at the end of 2019, 2020, and 2021, respectively. Although 80% to 90% is the ideal range, it varies from nation to nation.

In South Africa, the minimal ratio is 91%; in Brazil, 70%; in India, 75%; in Kenya, 76%; and in Nigeria, 65%. An increased loan-to-deposit ratio demonstrates the bank’s capacity to draw clients. The bank will have more money to lend out if its deposit grows because of additional customers, which would boost its profitability and draw in more investors.

It is important to emphasize that the financial system has significantly supported the development of the country’s economic resilience in the face of global shocks and will continue to do so through 2023. In the same line, the CBN’s money and credit data showed that, despite the redesign of the current banknotes, the money supply, also known as M2, had increased to an all-time high of N54.19 trillion in March 2022.

The money supply, which is the total amount of money in circulation in an economy, increased by 2.4 percent month over month from N52.92 trillion in February 2023 to N54.19 trillion in March 2023, according to data on the CBN website.

From N52.84 trillion in January 2023, the money supply has grown by 2.6 percent so far this year. Demand deposits, quasi-money, and foreign currency make up the money supply. According to a breakdown of the data on the money supply, the amount of quasi-money, or highly liquid assets that are easily convertible into cash, increased by 2.74 percent year to date to N32.84 trillion in March 2023 from N31.96 trillion in February of this year.

From N843.3 trillion, as reported by the CBN in February 2023, currency outside banks climbed to N1.45 trillion in March 2023. Demand deposits—amounts deposited in bank accounts that may be withdrawn immediately and without notice—fell from N20.11 trillion in February of this year to N19.91 trillion in March of 2023, a 1.04 percent MoM reduction.

The rise illustrates how the Supreme Court’s decision to reinstate the old N200, N500, and N1,000 notes into circulation through December 31, 2023 has had an effect. Additionally, the amount of money in circulation will increase by 71 percent from February 2023’s N982 billion to N1.68 trillion in March 2023.

Read also: Nigerian banks hooked on non-core lending income despite CBN push

Factors affecting the flow of private sector credit and economic growth

The recent unstable financial climate slowed credit flows, prompting debate on why. The current lending slowdown is occurring in a climate of record low policy rates and monetary stimulus, not rising credit costs like in East Asia and Latin America in the 1990s. loan flows have fallen due to the general slowdown in economic activity, while some critics blame banking institutions’ loan rationing (despite low-interest rates).

According to this credit crunch theory, interest rates do not balance the supply and demand for credit in the face of asymmetric information, and rational lenders who want to maximise profits purposefully limit liquidity to prevent dangerous asset accumulation.

Policymakers must assess if slow credit activity is attributable to low demand or insufficient supply. If financial institutions’ stricter lending standards are the main reason of the credit flow reduction, regulatory steps to soften prudential rules and targeted monetary easing may erase regulatory impediments to credit expansion. If credit demand is falling due to weak business activity, economic policies that boost aggregate demand may be more effective at boosting credit growth.

Interest rate structure is a key financial indicator. It also affects private-sector loans and investments. Higher lending rates and a tighter monetary policy, which are necessary to contain inflationary pressures, restrict private sector credit flow, while lower rates and a more lenient credit policy increase it.

Hoffman (2001) says credit availability and demand affect economic activity, interest rates, and property values. The economy and its outlook affect consumption, investment, and financing. However, household income and business cash flow reflect economic activity. Because cash flow and income determine a company’s and household’s ability to repay debts, economic activity may affect financial institutions’ willingness to lend. Thus, the economy may affect credit availability.

Interest rates lower credit demand. Interest rates increase loan costs, reducing demand. Monetary tightening, which raises interest rates, may restrict lending availability by banks. Due to monetary tightening, firms and consumers’ creditworthiness may fall, reducing loan availability. The banking sector may lose reserves and loanable money if the central bank tightens monetary policy through open market sales, reducing loan availability.

Real estate prices also affect loan availability and demand. Property accounts for a substantial amount of household assets, hence property value changes may affect loan demand in terms of wealth. Since loans are often secured by real estate, property prices may impact private sector borrowing. Real estate value increases collateralized asset value, which improves business and family creditworthiness.

Financial institutions are more willing to lend, increasing private sector lending. Economic activity, interest rates, and housing values may affect loan availability and demand. Due to the difficulties of discovering demand and supply implications in credit aggregate analysis, credit aggregate drivers are rarely studied. We feel it is important to understand credit aggregate development factors, even though demand and supply consequences are hard to pinpoint.