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Nigeria’s private sector credit struggles to catch up with peers

There has been recent expansion in credit to the private sector in Africa’s largest economy but the pace of growth remains too weak to match what is obtainable in peer countries, leaving a sizable funding gap for millions of businesses.

Total lending to the private sector in Nigeria hit N33 trillion ($8bn) in July 2021, a 10 percent increase compared with the same period last year.

This increase follows an aggressive push by the Central Bank of Nigeria (CBN) to compel banks to open the taps on lending as the country struggles to fight back the impact of two quick economic contractions and the slowdown associated with the still raging COVID-19 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.

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

The banks however are cautious of the risks in an economy that contracted by the most in three decades last year, and has not grown in per capita terms since 2015.

The recent expansion in private sector lending in Nigeria means credit as a percentage of GDP has jumped to 20 percent. That compares with 12.1 percent in 2020, according to World Bank data.

Despite the recent increase, Nigeria continues to lag peer African countries.

Of Africa’s five largest economies, South Africa has the highest private sector credit as a percentage of GDP with 128.9 percent, according to the most recent World Bank data, while Morocco is in second place with 87.75 percent.

Kenya is a distant third with 32.74 percent while Algeria and Egypt boast 29.6 percent and 27.3 percent, respectively.

“Nigeria needs to push up its ratio to get credit and thus investment into the country,” says Gregory Kronsten, chief economist at FBNQuest.

Nigerian banks are risk averse and have long preferred to park cash in less risky government bonds. To force banks to lend more to the private sector and less to the government, the CBN in July 2019 mandated banks to lend at least 60 percent of their deposits or have the extra cash taken away from them. The ratio was later reviewed upward to 65 percent as the CBN sought to further trigger credit expansion in an economy starved of growth.

“The reasonable rate of growth in private-sector credit extension is the result of the pressure by the CBN on the industry to expand loan books,” analysts at FBNQuest said in a note to clients.

They however admitted that “there is a long way to go in boosting financial intermediation when we consider the scale of the unbanked informal economy.”

While the CBN’s policies have seen more credit flow the way of the private sector, the ongoing COVID-19 pandemic may force a slowdown.

“Banks will be very conservative in lending due to the setback caused by COVID-19 on businesses,” Ayodeji Ebo, senior economist/head, research and strategy at Greenwich Merchant Bank, said.

“I think loans and advances will only improve considerably if the economy sustains its positive momentum,” Ebo said.

The economy expanded by the most since 2014 in the second quarter of 2021, following a growth of 5 percent, but that was solely down to the low base from last year when the economy contracted by 6 percent due to the COVID-19-induced strict lockdown of the economy.

Analysts say it will take meaningful reforms from the government to boost growth sustainably, reduce unemployment and improve average incomes which have dwindled in the last six years and caused many Nigerians to fall into the poverty pit.

Analysts at FBNQuest agree that indeed the growth momentum of credit is slowing, using a new data series from the CBN which covers lending from all sources including the CBN and the state-owned development banks.

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.”

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