• Thursday, July 25, 2024
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Banks’ credit rising despite CBN’s tightening stance

Increase in minimum capital requirements for Nigerian banks (Part II)

Nigerian banks’ net domestic credit (NDC), consisting of loans to the private sector and the government, has maintained a steady increase, rising to an all-time high of N61.19 trillion in August 2022, despite the monetary policy tightening by the Central Bank of Nigeria (CBN).

Data obtained from the CBN show that the NDC went up by 33.02 percent year-on-year from N46.00 trillion in August 2021.

On a month-on-month basis, it increased by 2.05 percent from N59.96 trillion in July 2022.

A breakdown of the credit allocation revealed that credit to the government rose to a record high of N21 trillion in August from N20.11 trillion in July. Year-on-year, the NDC to the government surged by 67.06 percent from N12.57 trillion in August 2021.

Credit to the private sector increased to N40.19 trillion in August from N39.85 trillion in the previous month. It jumped by 20.18 percent year-on-year from N33.44 trillion in August 2021.

The CBN has increased its benchmark interest rate, known as the monetary policy rate, three consecutive times this year to 15.5 percent as part of measures to rein in inflation.

Nigeria’s headline inflation accelerated to the highest level in 17 years to 20.52 percent in August from 19.64 percent in the previous month, according to the National Bureau of Statistics.

Some industry watchers are surprised that credit to the economy is rising, despite the central bank’s tightening stance.

Taiwo Oyedele, head of tax and corporate advisory services at PwC, said a possible reason for this could be that banks were able to mobilise more deposits from customers following the recent increase in deposit rates, especially on savings accounts.

“The rising interest rates and real negative returns environment may be discouraging many investors from taking long-term positions, hence resorting to placements with banks in the short-term, which banks, in turn, are extending to the private sector in form of credit,” he said.

Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank, said: “Banks continue to support the economy to create jobs and grow GDP. As banks continue to mobilise deposits, they will be positioned to support viable businesses.”

A recent report by FBNQuest shows the current level of Private Sector Credit Expansion (PSCE) implies a PSCE/GDP ratio of about 23.2 percent.

“Although an improvement over the 20 percent level as at end-2020, there is still a long way to go in terms of increasing financial inclusion, even when compared with the 38 percent level for sub-Saharan Africa, which is still low,” it said.

The report said this measure of PSCE covers lending by the entire banking system and not merely the deposit money banks (DMBs). It also covers lending by the CBN and state-owned development banks, such as the Bank of Industry, and smaller credit extensions by other banks, such as micro-finance banks and non-interest banks.

According to a narrower measure of PSCE obtained from the CBN’s quarterly statistical bulletin for Q1 2022, total PSCE reached N25.3 trillion as at end-March 2022, an increase of 20.3 percent y/y. This series covers only lending by DMBs.

This leaves a gap of around N14.9 trillion (between total PSCE and lending by DMBs), of which a small proportion is partly attributable to the time lag.

Read also: CBN’s CRR hike to mop banks’ liquidity by extra N1.6trn

However, the sizable proportion of the difference can be explained by the CBN’s increasing credit interventions, and lending by state-owned banks such as the Bank of Industry.

The communique from the meeting of the Monetary Policy Committee (MPC) in September put the CBN’s total injections into the economy over the last three years at N9 trillion. These include cumulative disbursements of about N2.1 trillion under its Real Sector Support Facility, and over N1.0 trillion under its Anchor Borrower’s Programme, among other intervention schemes.

“As shown in our chart, private sector credit extension and other monetary aggregates have continued to expand rapidly in recent months despite the CBN’s efforts to tighten monetary policy to reduce inflation,” analysts at FBNQuest said.

The report said credit growth to the government continued to outpace other monetary aggregates. It increased by 67.1 percent y/y in August, following a 65.8 percent y/y gain in July. This contrasts with the average growth rate of about 20.5 percent y/y for the other three other measures.

It said the strong expansion of money and credit growth partly explained the MPC’s move to increase banks’ cash reserve ratio by 500 basis points (bps) to 32.5 percent, in addition to a 150bps increase in the policy rate to 15.5 percent.