Bank loans to government rise 16%, leave less for businesses

Banks’ net credit to the government increased by 16 percent year-on-year (y/y) to N14.27 trillion in January 2022 from N12.30 trillion in the corresponding period a year earlier, according to data from the Central Bank of Nigeria (CBN).

The CBN also showed that on a month-on-month basis, net credit to the government increased by seven percent from N13.32 trillion in December 2021.

“This can be attributed to the increased participation of banks in the last Treasury bills and FGN Bonds auctions,” said Ayodeji Ebo, head of retail investment at Chapel Hill Denham.

He noted that the Federal Government had allotments significantly higher than the amount offered.

The implication, according to him, is less funds for the private sector and available funds will be at a higher lending rate to the private sector.

“Additionally, this will also reduce banks’ participation in commercial papers issued by the corporates. As long as the banks have attractive and safe investment alternatives, there can’t be any rise in lending to the private sector due to the higher inherent risk,” Ebo said.

Taiwo Oyedele, head of tax and corporate advisory services at PwC, said the increase in bank credits to government, relative to the private sector, might be as a result of the expiration of tax waivers on corporate debt instruments as well as the heightened credit risks due to rising costs, liquidity challenges and margin pressures.

“If the government is crowding out the private sector, it will be difficult to sustain the current economic recovery, which is built largely on the back of private sector investment. If the trend continues, Nigeria may experience lower-than-expected GDP growth rate in 2022,” Oyedele said.

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The CBN data on money and credit growth showed that total credit to the private sector increased by 15.7 percent y/y to N35.4 trillion.

Although growth has slowed since November of last year, the double-digit growth rate is encouraging, according to FBNQuest.

A narrower measure of private-sector credit extension (PSCE) is captured in another series in the CBN’s quarterly statistical bulletin, which covers only lending by deposit money banks. It shows a total of N21.8 trillion at the end of September 2021, representing 17.8 percent y/y growth.

“The gap of almost N14 trillion can be partly explained by the four-month lag and increased disbursements by the CBN under its development finance initiatives,” FBNQuest said in its latest report on PSCE.

According to the report, despite the double-digit PSCE growth rate, there is still a gap in the number of people who benefit from formal financial intermediation. Nigeria’s PSCE/GDP ratio improved marginally to 20.1 percent in January from 19.8 percent a year earlier, based on FY 2021 GDP data.

In contrast, data from the World Bank for 2020 show comparable ratios of 107.9 percent, 32.0 percent, and 27.1 percent for counterparts such as South Africa, Kenya, and Egypt.

South Africa’s high percentage reflects the country’s progress in financial intermediation and the development of its banking sector. A PSCE/GDP ratio of 70 percent is considered an acceptable ratio for a well-developed financial system.

In Kenya, product offerings that arose from collaborations between mobile network operators and banks have helped to drive financial intermediation. One such product is M-Shwari, a paperless banking service provided by a commercial bank through M-Pesa that allows customers to obtain loans despite them having no prior banking history.

In Nigeria, recent partnerships between commercial banks and fintech companies have the potential to expand credit access and financial inclusion.

“This is expected to be facilitated by the CBN’s endorsement of open banking, which allows banks to integrate with fintechs and other third parties through Application Program Interfaces as the primary means of connectivity and data sharing,” analysts at FBNQuest said.