Finance and insurance sector grow economy by 30.83% on CBN rate hike

The finance and insurance sector’s real gross domestic product rose to 30.83 percent in the third quarter of 2024 on the tight monetary stance of the Central Bank of Nigeria (CBN).

According to the latest Gross Domestic Product (GDP) report, growth in this sector in real terms totaled 30.83 percent, higher by 2.62 percent points from the rate recorded in the 2023 third quarter and higher by 2.04 percent points from the rate recorded in the preceding quarter,

“The Finance and Insurance Sector consists of the two subsectors, Financial Institutions and Insurance, in which the former accounted for 91.76 percent and the latter 8.24 percent of the sector respectively in real terms in Q3 2024,” the report said.

The report further disclosed that in terms of growth, the finance and insurance sector’s real GDP rose to 5.51 percent in Q3 from a 3.70 percent increase from the rate recorded in the 2023 third quarter.

Experts say the financial services sector growth appears strong, but unusual owing to the aggressive rate hike that’s occurred all through the year.

In a sixth move this year, the CBN raised the rate to 27.50 percent in November to curb rising inflation in the economy. This has however boosted banks’ income earning streams thereby making them one of the gainers of interest rate hikes.

“The banks’ main business is lending and for them to lend money out they charge a fee which is the interest funds they give. A hike in interest rate can result in a repricing of the asset. Lending is their core business, but they have to reprice their asset, which will continue if interest rates remain high,” Nabila Mohammed, investment analyst at Chapel Hill Denham, said.

She said the banks are enjoying both loans and investment securities because yields in the market are attractive for entry-level and that it was clear at the beginning of the year that the CBN would hike interest rates.

The CBN in November raised its monetary policy rate by 50 basis points to 27.50 percent in a bid to fight inflation. In September, the CBN increased the interest rate by 50 basis points to 27.25 percent.

Apart from the MPR hike, the liberalisation of the foreign exchange regime in June weakened the naira from N463.38/$ to N1,660.83/$ as of November 28, 2024. At the parallel market, the naira is being traded at around N1,750/$ as against 762/$ before the FX reform.

According to a report by Analysts Data Services and Resources, GDP growth in Q3’24 is further driven by the finance and insurance sector to 3.46 percent.

“The sector has constantly remained the fastest growing sector in recent times,” it said.

The sector’s growth has had a ripple effect, creating jobs, improving financial inclusion, and increasing revenue for the government. However, experts caution that the long-term impact of sustained rate hikes on borrowing costs and economic growth should be monitored.

“The impressive numbers from the finance and insurance sectors reflect the country’s resilience, but policymakers must balance monetary tightening with support for other struggling sectors,” said Ifeoma Adedayo, a Lagos-based economist.