Deposit money banks’ lending to the private sector reached an all-time high of N54.76 trillion in August, driven partly by foreign exchange revaluation gains occasioned by the central bank’s recent reforms and Loan to Deposit Ratio (LDR) policy.
Data from the Central Bank of Nigeria (CBN) showed that credit to the private sector stood at N41.54 trillion in January 2023, N41.75 trillion in February, N43.01 trillion in March, N43.66 trillion in April, N44.78 trillion in May, N52.81 trillion in June, and N54.16 trillion in July.
Between June and August, banks’ credit to the private sector increased by N 1.95 trillion or 3.69 percent.
Banks’ net domestic credit also increased to an all-time high of N87.27 trillion in August, according to data obtained from the CBN.
Net domestic credit comprises net credit to the government and to the private sector. A breakdown of the credit distribution shows that domestic credit (net) to the government stood at N32.51 trillion in August, the highest ever.
The growth in domestic credit, especially credit to the private sector, is attributable to banks’ FX revaluation gains, the LDR and other policies introduced by the CBN to spur growth in the real sector of the economy, according to analysts.
On June 14, 2023, the central bank collapsed all segments of foreign exchange markets into the Investors and Exporters (I&E) forex window.
According to a circular signed by Angela Sere-Ejembi, director of financial markets, applications for medicals, school fees, business travel allowance and personal travel allowance, and SMEs would continue to be processed through deposit money banks.
In 2019, the CBN raised the LDR of commercial banks to 65 percent in order to spur growth in the real sector of the economy.
Data from the CBN show private sector credit extension (PSCE) increased by 36 percent year-on-year (y/y) to N54.2 trillion as at the end of July 2023. The month’s growth rate slightly outpaced the 35 percent y/y growth it delivered in June 2023.
On a year-to-date basis, PSCE grew by 23 percent. The PSCE data reflects lending from all sources, including CBN and state-owned development banks, such as the Bank of Industry, and smaller credit extensions by other banks, such as microfinance and non-interest banks, according to a report by FBNQuest.
Nigeria’s PSCE to GDP (2022) ratio is approximately 24 percent. This compares with 38.3 percent for the broad group of sub-Saharan African peers, based on data from the World Bank.
According to the data, credit extension to the government expanded by 61 percent y/y, although it was lower than the 72 percent y/y growth recorded the previous month.
Credit extension to the government has averaged about 75 percent y/y over the seven months to July 2023. “This outpaced the combined average growth rate of about 67 percent y/y of all other monetary aggregates that we track,” FBNQuest said.
It said: “The surge in credit extension to government can be attributed to revenue shortfalls relative to expenditure, resulting in government’s fiscal deficits. As such, the funding shortfalls have led to a rise in domestic and external borrowings.
“Additionally, the restrictive monetary policy stance by major central banks around the world, which has resulted in tighter global credit conditions, has shifted the government’s focus to the utilization of domestic borrowing to plug its funding gap.”
Yemi Kale, partner and chief economist, KPMG Nigeria, said the increase in credit to the private sector was mostly driven by FX revaluation.
He said bank credit includes FX credit and FX credit has risen due to naira depreciation. “So it pushed most of it up.”
Ayodeji Ebo, managing director/chief business officer at Optimus by Afrinvest, said the niar devaluation will also have an impact on the naira value of the credit to the private sector based on dollar loans created. “This implies the growth may not be linked only to increase in new loans but due to revaluation of dollar loans due to the adjustment in the naira,” he added.
For Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, Nigerian banks continue to support the economy by financing projects and businesses that have potential to generate employment opportunities, income, taxes for the government and that stipulate economic growth of the nation.
He said the growth in the naira value of the foreign currency loans contributed to the credit expansion.
Last month, the CBN instructed banks not to use the FX revaluation gains to pay dividends or for other operational expenses.
The apex bank stated this in a circular to all banks dated September 11, 2023 and signed by Haruna Mustafa, director, banking supervision department.
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Instead, the CBN advised the banks to save the money to hedge against any future volatility.
“Banks are required to exercise utmost prudence and set aside the foreign currency revaluation gains as a countercyclical buffer to cushion any future adverse movements in the FX rate in this regard, banks shall not utilise such FX revaluation gains to pay dividend or meet operating expenses,” it said in the circular.
Kingsley Obiora, former CBN’s deputy governor, said in his personal statement at the last Monetary Policy Committee meeting in July that the financial soundness indicators showed that the banking system remained stable and resilient.
The capital adequacy ratio (CAR) and liquidity ratio of banks have remained above the minimum thresholds. Although CAR decreased to 11.2 per cent in 2023 from 14.1 per cent, it remained above the 10.0 per cent prudential requirement. The liquidity ratio was also above the 30.0 percent regulatory minimum ratio. It increased significantly from 42.6 per cent in June 2022 to 48.4 per cent in June 2023.
The Non-performing loans (NPLs) ratio remained below the maximum prudential requirement of 5.0 per cent. It declined from 5.0 per cent in June 2022 to 4.1 per cent in 2023. The continuous decline in NPL was attributable to write-offs, restructuring of facilities, Global Standing Instruction and sound credit risk management.