Banks’ credit to businesses up N19.04trn in one year

Banks’ credit to the private sector increased by N19.04 trillion in one year, despite the high cost of borrowing.

Data from the Central Bank of Nigeria (CBN) show a 34 percent increase in private sector credit, rising from N56.46 trillion in July 2023 to N75.5 trillion in July 2024.

Month-on-month (MoM), it went up by about N2.3 trillion between June and July 2024, highlighting their ongoing resilience and support for the country’s economic growth.

According to the CBN banks’ loans and other facilities to the private sector grew by nearly a third, underscoring the banking sector’s strength and contribution to the economy. The report revealed a 33.7 percent rise in credit to the private sector (CPS), reaching N75.48 trillion in July 2024, up from N56.46 trillion in July 2023—a gain of N19.02 trillion. A closer look shows that CPS increased by 3.1 percent or N2.29 trillion from N73.19 trillion in June 2024 to N75.48 trillion in July 2024.

CPS includes loans, trade credits, and other receivables provided by banks to the private sector and reflects the banking sector’s balance sheet strength and its role in supporting the national economy. The latest figures point to sustained growth in banks’ operations and deployment of funds to productive sectors of the economy.

A CBN report noted a significant increase in bank deposits during the first half of 2024. Demand deposits rose from N26.7 trillion in December 2023 to N33 trillion by June 2024. Banks maintained steady deposit growth across the quarters, with a rise of 8.1 percent to N28.9 trillion in the first quarter of 2024 and a 14.3 percent increase to N33 trillion in the second quarter.

Most banks have experienced substantial deposit increases recently, enabling them to extend new loans and advances. Experts suggest that banks are well-positioned to continue creating more loans due to aggressive growth strategies and a favorable regulatory environment.

Operational reports from banks show significant growth in deposits in 2023. Access Holdings’ deposits rose from N6.10 trillion in 2022 to N9.4 trillion in 2023. Zenith Bank grew deposits from N5.86 trillion to N11.43 trillion, while FBN Holdings’ deposits increased from N5.25 trillion to N7.85 trillion. United Bank for Africa (UBA) doubled its deposits from N4.83 trillion in 2022 to N9.32 trillion in 2023, and Guaranty Trust Holding Company’s deposits rose from N3.47 trillion to N5.22 trillion.

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A recent report on capital importation indicated that banks attracted nearly two-thirds of capital imported into the country, signaling confidence in Nigerian banks as foreign investors take a more active role in the economy. Experts agree that increased private sector credit boosts economic growth, as studies consistently find a direct link between bank lending and Gross Domestic Product (GDP) growth.

Cordros Capital analysts expect the upward trend in credit to the private sector to continue. “We believe the CBN’s reinforcement of the loan-to-deposit ratio will sustain commercial banks’ willingness to create risky assets in the short to medium term,” they stated. However, some analysts caution that the CBN’s tightening monetary policy may limit the pace of growth.

A CBN study found that credit enhances growth even when factors like trade openness, monetary policy, and infrastructure are weak. It concluded that private sector credit drives economic growth. The strength of bank balance sheets also influences the flow of credit, with continued lending increases amidst economic challenges reflecting the resilience and stability of Nigerian banks.

An International Monetary Fund (IMF) study on bank balance sheet strength during the global financial crisis concluded that banks with robust balance sheets were better able to maintain lending during economic downturns. The study suggested that stronger capital bases are vital for credit recovery following crises and supported regulatory proposals under the Basel III framework.

Olatunde Amolegbe, managing director of Arthur Steven Asset Management, attributed the growth in credit to increased economic activity but cautioned that inflation and devaluation could moderate this growth. Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), called for a broader distribution of credit across all company sizes and sectors, emphasising that small businesses, crucial for job creation, often do not receive sufficient credit access.

Yusuf also noted that banks are typically cautious about lending to small businesses due to perceived credit risks and urged efforts to ensure inclusive and stable credit access, particularly to growth sectors like agriculture, manufacturing, real estate, mining, and construction.

CBN Governor Olayemi Cardoso highlighted that ongoing recapitalisation would further strengthen banks, helping to drive the $1 trillion national economic target and support stable growth. He emphasised that additional capital would provide a substantial buffer against potential economic challenges and enhance the global competitiveness of Nigerian banks.

Experts agree that given the evolving dynamics in the banking sector and the broader economy since the last recapitalization, strengthening banks’ financial positions is essential.