Nigeria’s private sector credit expansion struggles to catch up with peer South Africa

There is something to cheer in the news that the total lending to the private sector in Africa’s largest economy increased by just under 10 per cent in the year ending July to N33 trillion or about $8 billion.

This impressive increase follows an aggressive push by the Central Bank of Nigeria (CBN) to compel banks to become less averse to credit expansion as the country struggles to fight back the impact of two quick economic contractions and the slowdown associated with the still raging covid pandemic.

Private sector leaders in Nigeria will hope that the CBN will not relent in its push and that the banks come around to seeing how credit expansion to the real economy benefits all by oiling the engine of economic growth.

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Nigeria’s private sector credit expansion/GDP ratio remains stuck at just 19.8% as at end-2020. In advanced economies where we all borrow on cards etc, the ratio is well over 100% of GDP and in peer country South Africa, it is about 80%.

“Nigeria needs to push up its ratio to get credit and thus investment into the country,” says Greg Kronsten, Chief Economist at FBNQuest.

Nigerian banks are risk averse and their position is rewarded by access to easy profit for them so the regulator would need to push even harder.

A note by analysts at FBNQuest suggest that the growth momentum of credit is slowing, using a new data series from the CBN and captured in a chart below and which covers lending from all sources including the CBN and the state-owned development banks.

According to the analysts, “the reasonable rate of growth in this measure of private-sector credit extension (PSCE) is the result of the pressure by the industry regulator (the CBN) on the industry to expand loan books. There is a long way to go in boosting financial intermediation when we consider the scale of the unbanked informal economy.”

Another CBN series in the Quarterly Statistical Bulletin (QSB) shows the allocation of credit by deposit money banks (DMBs). It gives us a total of NGN21.02trn in March 2021, representing a y/y increase of 13.7% the analysts said.

In their report, the FBNQuest analysts said “part of the growth in lending by the DMBs is due to the weakness of the currency, which adds to the naira equivalent of the industry’s fx-denominated loans. We assume that much of this lending would have been directed to the oil and gas industry.

“Part of the noted difference in the two data series can be explained by the loans of four development finance institutions, led by the recapitalized Bank of Industry (BoI). These amounted to a further NGN940bn in aggregate at end-2020. In August the BoI announced that it planned to raise up to EUR750bn from the sale of global bonds. The funds raised will be on-lent to Nigerian companies out to ten years at single-digit rates.

“The greater part of the difference can be explained by the execution of the CBN’s development finance role. The latest communique from the monetary policy committee from July noted disbursements of NGN760bn under the anchor borrowers’ programme, NGN920bn under real sector intervention and NGN320bn under the targeted credit facility. We assume that these are disbursements since the onset of COVID-19. They cover three of more than ten CBN lending programmes.

“The y/y growth in money supply (M3) has slowed since the start of the year. This measure includes CBN bills held by money holding sectors, and it may well be that the slowdown reflects the reduced issuance of bills in support of the central bank’s open market operations (OMO).”