Nigeria’s financial system is becoming increasingly liquid, supported by stronger foreign exchange inflows and an expanding money supply. Yet the additional liquidity is not translating into stronger lending to businesses, raising questions about the effectiveness of monetary policy in stimulating investment and economic activity.
The latest Monetary and Credit Statistics published by the Central Bank of Nigeria (CBN) for May 2026 paint a picture of an economy where liquidity conditions are improving, but businesses remain reluctant to borrow, while banks continue to exercise caution in extending new credit.
Analysis of the CBN data by the Financial Markets Dealers Association (FMDA) shows that broad money supply (M3) increased by 3.38 percent month-on-month to N129.21 trillion in May from N124.99 trillion in April.
Similarly, money supply (M2) rose by 3.38 percent to N129.20 trillion from N124.98 trillion in April, reflecting increased liquidity within the financial system.
Ordinarily, rising money supply signals greater liquidity in the banking sector, creating conditions that could support stronger lending to businesses and households. However, the May figures suggest that while liquidity is improving, credit demand remains weak.
According to FMDA’s analysis, the increase in money supply was driven largely by stronger foreign currency inflows into the economy.
Net Foreign Assets (NFA), a key indicator of foreign exchange earnings and external liquidity, rose by 12.23 percent to N26.95 trillion in May from N24.01 trillion recorded in April.
The association said the increase in NFA suggests that Nigeria’s earnings from external engagements strengthened during the month.
It noted that the improvement may have been supported by higher crude oil export receipts amid elevated global oil prices during the United States-Iran conflict, alongside other autonomous foreign exchange inflows into the economy.
In addition to the rise in foreign assets, Net Domestic Assets (NDA) also increased by 1.28 percent to N102.26 trillion from N100.97 trillion in April, contributing further to liquidity growth within the financial system.
Despite these positive developments, lending to the private sector remained subdued.
CBN data showed that private sector credit extension (PSCE) grew by 1 percent month-on-month and 4 percent year-on-year to N81 trillion in May 2026, indicating only a gradual expansion in credit to businesses and households.
The Quest Merchant Bank analysis similarly showed that private sector credit rose by only 0.57 percent to N81.04 trillion during the month.
Although the two datasets use different measurement approaches, both point to the same underlying trend, credit growth remains modest despite improving liquidity conditions.
According to the analysis, the pace of lending continues to reflect cautious behaviour across the financial system.
One of the major factors limiting credit expansion is the prevailing tight monetary policy environment.
For much of the past year, the CBN maintained elevated interest rates as part of efforts to contain inflation and stabilise the economy.
Higher borrowing costs have encouraged banks to adopt a more conservative approach to lending, with greater emphasis on protecting asset quality rather than pursuing aggressive loan growth.
As a result, credit creation by deposit money banks, state-owned development finance institutions and smaller lenders has remained constrained.
The challenging macroeconomic environment has also influenced lending decisions.
Beyond high borrowing costs, businesses and households continue to operate under conditions that increase the risk of loan defaults.
According to the analysis, these conditions have encouraged financial institutions to remain cautious in extending fresh credit.
Earlier in the year, there were expectations that easing inflationary pressures could create room for a more accommodative monetary policy stance.
Those expectations received a boost in February when the CBN reduced the Monetary Policy Rate (MPR) by 50 basis points, a move that was expected to improve credit accessibility across the real economy.
Lower interest rates were expected to encourage businesses to borrow, expand operations and increase investment.
However, the anticipated improvement in lending did not materialise.
Analysts at Quest Merchant Bank said borrowing decisions continued to be influenced by factors beyond interest rates.
According to them, global uncertainties continued to weigh on business confidence despite the monetary easing earlier in the year.
The disruption of key international shipping routes during the United States-Iran conflict increased freight costs and raised production expenses for manufacturers.
At the same time, rising input costs, supply chain disruptions and uncertainty over future demand encouraged many businesses to postpone expansion plans.
Rather than taking on new debt, many firms delayed borrowing commitments while assessing the evolving economic environment.
The temporary optimism created by easing inflation also proved short-lived.
Energy-related shocks arising from global supply chain disruptions linked to the Middle East conflict reintroduced upward pressure on consumer prices.
The renewed inflationary risks prompted the Monetary Policy Committee (MPC) to adopt a more cautious stance.
Instead of continuing with further monetary easing, the committee opted to hold policy rates at its May meeting, marking a shift from the 50 basis-point rate cut implemented in February.
Looking ahead, FMDA expects the MPC to maintain its cautious policy bias when it meets again in July.
Although shipping activity has gradually resumed in the Strait of Hormuz following signs of progress toward a possible United States-Iran resolution, the association believes external uncertainties remain significant enough to justify a cautious approach.
Consequently, tight monetary conditions are expected to persist in the near to medium term.
While this may continue to restrain the pace of credit growth, the analysts said banks’ expanded capital base is expected to provide some support for modest lending growth over time.
The May data also highlight contrasting trends in public and private sector borrowing.
While private sector credit recorded only modest growth, credit to government increased by 1.97 percent to N40.38 trillion, reflecting continued public sector demand for financing.
Other monetary indicators also reflected changing liquidity conditions within the financial system.
Currency outside banks rose by 2.15 percent to N5.19 trillion from N5.08 trillion in April.
Currency in circulation also increased by 0.77 percent to N5.69 trillion from N5.65 trillion.
Meanwhile, bank reserves declined by 2.43 percent to N33.76 trillion from N34.60 trillion, while base money fell by 1.98 percent to N39.45 trillion from N40.25 trillion recorded in April.
Taken together, the data suggest that liquidity conditions across Nigeria’s financial system are improving, largely on the back of stronger foreign exchange inflows and rising money supply.
However, the stronger liquidity has yet to translate into a significant increase in private sector borrowing.
According to FMDA, businesses remain focused on managing risks and preserving cash amid lingering domestic and global uncertainties.
The association said this cautious approach has limited the transmission of lower interest rates into stronger borrowing and investment activity.
For policymakers, the May data underscore the challenge of ensuring that improved liquidity flows through to the real economy.
While stronger foreign exchange inflows are boosting liquidity and improving the financial system’s capacity to support growth, businesses remain reluctant to take on additional debt in an uncertain operating environment.
Until confidence improves and firms become more willing to expand investment, Nigeria’s liquidity gains may continue to coexist with only modest growth in private sector credit, limiting the broader impact of improving monetary conditions on economic activity.
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