Despite the stringent policy measures implemented by the Central Bank of Nigeria (CBN), commercial banks in the country have witnessed a remarkable 44 percent year-on-year surge in their total credit to the private sector, reaching a substantial N59.7 trillion as of November 2023.
Data sourced from the CBN indicates that the private sector credit extension (PSCE) experienced a robust 43 percent increase over the eleven-month period leading up to November 2023.
The data encompasses lending activities across the entire banking system, encompassing entities beyond deposit money banks (DMBs), a new report by FBNQuest noted.
Deposit money banks contribute to 69 percent of the overall figure, with additional lending from the CBN, state-owned development banks such as the Bank of Industry, and smaller credit extensions by other institutions including micro-finance banks and non-interest banks.
In response to rising inflationary pressures, the CBN has implemented a series of restrictive measures, as outlined in a report by FBNQuest.
These measures include the reintroduction of Open Market Operation (OMO) auctions, Cash Reserve Requirement (CRR) debits, lifting the N2.0 billion cap on Standing Deposit Facility for Deposit Money Banks (DMBs), and modifying the asymmetric corridor of the Monetary Policy Rate (MPR) to (+100/-300bps) from the previous (+100/-700bps).
To effectively curb inflation, the CBN has consistently pursued liquidity tightening through OMO sales. In the fourth quarter of 2023, the Central Bank conducted three OMO auctions, followed by another in January 2024. During the most recent auction, the CBN set a one-year tenor with a stop rate of 17.5 percent, attracting a substantial oversubscription of N350 billion.
On January 11, 2024, the CBN conducted its first OMO sales of the year, amounting to N357.2 billion. These measures reflect the central bank’s commitment to employing strategic financial tools to maintain economic stability amidst inflation challenges.
As stakeholders analyze the implications of this significant uptick, it remains to be seen how the central bank will respond to this unexpected surge in private sector credit.
Muda Yusuf, director of the Centre for Promotion of Private Enterprise (CPPE), expressed deep concern over the excessive spread between deposit and lending rates within the Nigerian banking system. According to Yusuf, this glaring discrepancy, exceeding 20 percent, is a troubling sign of serious efficiency issues in the country’s banking sector, making it one of the highest spreads globally.
Yusuf highlighted that the average spread for sub-Saharan countries is 10 percent, significantly lower than Nigeria’s current rate, and the global average stands at approximately 6.6 percent. The elevated spread in Nigeria is viewed as detrimental to investment growth and serves as a disincentive to savings.
The director emphasized the urgent need for the banking industry to address these inefficiencies, as such a substantial spread has far-reaching implications on the overall economic landscape. Investors and savers alike may be discouraged, impacting the country’s economic growth potential.
This revelation brings to the forefront the critical issue of addressing inefficiencies within the Nigerian banking system to foster a more conducive environment for investment and savings, ultimately contributing to sustainable economic development, he added.
“The spread between deposit and lending rates in the Nigerian banking system is too high. It is an indication of serious efficiency issues in the banking system, Yusuf said.
In its latest move to combat rising inflation, the Monetary Policy Committee (MPC) convened in July 2023, marking the eighth consecutive increase in the benchmark interest rate to 18.75 percent.
As speculation mounts over the possibility of a new meeting this month, Nigeria’s Central Bank has yet to confirm the details.
Analysts at FSDH anticipate future interest rate adjustments to tackle inflation while maintaining a delicate balance to support economic growth and alleviate high borrowing costs. FSDH estimates the Monetary Policy Rate (MPR) to stabilize at 19 percent in the first half of 2024, with potential downward adjustments in the latter half contingent on a decline in the inflation rate.
“While interest rate hikes and the issuance of monetary instruments to mop up liquidity are inevitable, we do not envisage excessive rate increases, as the apex bank will also consider the need to boost economic growth and curtail high borrowing costs for both businesses and the government.
The MPR is expected at 19 percent in the first half (H1) of 2024 and will be adjusted downwards as the inflation rate declines in H2,” the analysts said.
“Although the CBN is yet to release the MPC meeting calendar for the year, we anticipate that the committee will raise the MPR by around 25-50bps at its next meeting,” analysts at FBNQuest said.
Banks net credit to the government has maintained a steady decline since the securitisation of the ways and means.
In three months alone, net credit to the government dropped by 76.68 percent to N5.16 trillion in November compared to N22.13 trillion recorded in September 2023, according to the CBN.
The sharp deceleration in credit extension to the government according to the FBNQuest report is unsurprising, considering the new CBN Governor’s plan to stop the financing of the government’s fiscal deficits through the Ways and Means advances and instead return to its core mandate of ensuring monetary and price level stability.
“We view this as a positive development because the rise in productivity credit extension to the government has been one of the drivers of inflationary pressures in the country,” analysts at FBNQuest said.
“With the headline reading for December 2023 surging by 72bps to 28.92 percent y/y and the continuous expansion of money supply, we believe that the Monetary Policy Committee will continue to raise interest rates to sustain its efforts in combating inflationary pressures,” the analysts said.