Why banks credit to private sector surged by 65.94% in one year

Nigerian commercial banks recorded 65.94 percent growth in credit to the private sector in one year, following high demand for facilities to meet the rising cost of goods and services.

Data from the Central Bank of Nigeria (CBN) showed that credit to the private sector increased to N74.31 trillion in May 2024 from N44.78 trillion in May 2023.

According to Muda Yusuf, CEO of the Promotion of Private Enterprise, the cost of goods has increased significantly. Despite rising prices, companies still need to purchase essential items for their operations. For example, the price of a brand-new vehicle, which was N12 million a year ago, has now surged to over N30 million for a brand-new Corolla. People still need to make these purchases.

Additionally, borrowing from banks has become more expensive, affecting the overall cost of financing. The general increase in prices has led to a higher nominal demand for credit, as businesses and individuals need funds to buy various goods. Due to the fluctuating exchange rate, importing goods has also become costlier. An item that could be imported for N750 to the dollar last year now costs around N1,500 to import.

The growth in banks’ credit to the private sector is despite the tightening stance of the CBN to rein in inflationary pressure.

The National Bureau of Statistics (NBS) on Monday released its June inflation report, which shows the headline Consumer Price Index (CPI) reached 34.19 percent, up from 33.95 percent in May, reflecting a 0.71 percent increase. On a month-to-month basis, the headline inflation rate for June 2024 was 2.31 percent increase, which is 0.17 percent higher than the 2.14 percent recorded in May 2024.

Read also: Banks credit to private sector declines by 11.93% in March

Core inflation, which excludes volatile agricultural produce and energy prices, was 27.40 percent in June, an increase from 27.04 percent in May 2024. This represents a year-over-year rise of 5.59 percent compared to 18.47 percent in June 2023.

Food inflation, a major contributor to overall inflation, rose to 40.87 percent in June, slightly up from 40.66 percent in May. Year-over-year, it surged by 15.61 percent from 35.35 percent in June 2023. The increase was mainly driven by higher prices for groundnut oil, palm oil, and other items in the oils and fats category, as well as staples like water yam, cocoyam, and cassava.

The CBN has raised its benchmark interest rate, known as the Monetary Policy Rate (MPR) by 750 basis point to 26.25 percent in May 2024, from 18.75 percent in July 2023, to rein in inflation, which is 33.95 percent as of May 2024.

“At the recent May 2024 Monetary Policy Committee (MPC) meeting, Governor Olayemi Cardoso emphasised that inflation remains the primary concern. He advocated for a stricter monetary policy approach, including higher interest rates, as effective tools to tackle the issue from a monetary perspective. However, he also acknowledged the presence of structural issues that require collaborative efforts from various stakeholders alongside these measures.”

He said on the other hand, there are compelling arguments to progress with the tightening regime, adding that there is no evidence that the downward trend in month-on-month inflation rate is sustainable and would eventually manifest in downward trend in headline inflation.

“More so, considering the various upside risks to price development from both the global and domestic economies, there is sufficient reason to be concerned about the continued uptick in inflation if we rest on our oars at this critical point. Furthermore, tightening will help to sustain the current momentum of capital inflows into the economy and provide necessary support for the currency in the near term. It is important to highlight that lingering high interest rates in advanced economies presents a real dilemma for emerging market economies seeking to attract capital inflows, and we must ensure that interest rates differentials remain sufficiently competitive by achieving positive real rates in the short term,” Cardoso said.