How government is crowding out lending to private sector

Nigerian banks’ total credit extension to the private sector increased by 16 percent Year-on-Year (y/y) to almost N36.4 trillion in March 2022, data from the Central Bank of Nigeria (CBN) showed.

The CBN’s steps to increase the minimum loan-to-deposit threshold for deposit money banks in 2019, the punitive discretionary Cash Reserve Ratio (CRR) debits for non-compliant banks, and its orchestration of lower market yields in recent years have played a major part in banks’ loan book expansion, analysts at FBNQuest said.

A chart by FBNQuest shows that credit to the government expanded sharply by 35 percent y/y in March.

Over the last year, credit to the government has grown faster than credit to the private sector, averaging 25 percent, compared with private-sector credit extension (PSCE) average of 14 percent.

According to reports, the CBN’s loans to the Federal government via ways and means financing amounted to N18 trillion in January 2022.

“It is easy to conclude that the government is crowding out lending to the private sector”, the analysts said in a report.

According to the report, the growing credit to the government reflects the government’s expanding fiscal deficits. The 2022 (amended budget) implies a fiscal deficit of N7.3 trillion or fiscal deficit to GDP ratio of 4.0 percent, higher than the 3.0 percent recommended in the Fiscal Responsibility Act.

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“Given the size of the deficit and the likelihood of actual revenue collections falling short of expectations, the high rate of credit extension to the government is likely to continue,” the analysts said.

The private-sector credit extension reflects lending from all sources, including the CBN and state-owned development banks. Although the y/y growth is still in double-digits, it is slightly below the 18.0 percent y/y growth in the preceding month. The CBN deserves most of the credit for expanding credit access, the report stated.

At its last meeting in March 2022, the Monetary Policy Committee (MPC) noted the continued resilience of the banking system, evidenced by the further moderation of the ratio of Non-Performing Loans (NPLs) to 4.84 per cent in February 2022 from 4.90 per cent in December 2021.

The Committee also noted that Liquidity Ratio (LR) remained above its prudential limit at 43.5 per cent in February 2022, while the Capital Adequacy Ratio (CAR), moderated slightly to 14.4 per cent in February 2022 from 14.5 per cent in December 2021.

Overall, the MPC members expressed confidence in the CBN’s regulatory

regime and commitment to maintaining stability in the banking system, urging the management to sustain its tight regulatory

surveillance.

However,despite recent gains, credit penetration in terms of GDP (PSCE/GDP) remains low, at roughly 20.7 percent of 2021 GDP, significantly below the 37.9 percent average for Sub-Saharan Africa and well below the global average of 147.9 percent, according to World Bank data.

According to EFina’s Access to Financial Services in Nigeria 2020 Survey report, almost 36 percent of Nigeria’s adult population were financially excluded. These compare with 11 percent and 7 percent for Kenya and South Africa respectively.

Consequently, there is a long distance to travel in terms of boosting financial intermediation and inclusion, particularly regarding the unbanked population.