• Monday, June 24, 2024
businessday logo


Implication of more lending to the Nigerian economy

Buhari’s Legacy: Nigeria empties treasury servicing debt as fiscal woes worsen

Nigerian banks have increased loans and advances to the real sector. According to findings by BusinessDay, credit to the economy grew by 76 percent from N15.61 trillion as of July 2019 to N27.53 trillion as of July 2022.

In other words, banks raised loans and advances within three years by an additional N11.92 trillion, which amounted to N3.973 trillion on an annual basis or N331 billion on a monthly basis.

The surge in lending to the economy by Nigerian commercial banks is in compliance with the directive given by the Central Bank of Nigeria in 2019 to the effect that Nigerian banks must have a loan-to-deposit ratio of 60 percent by September 30, 2019. This basically implies that every bank must give out loans and advances up to 60 percent of its deposits.

The directive was a bold move by the CBN as the world over, credit is the lifeline of businesses. It is only when businesses are thriving that jobs can be created, taxes paid to the government, and crime rates will be drastically reduced.

A leading consulting firm, Agusto & Co submitted that traditional sectors such as oil and gas, manufacturing, general commerce, and agriculture will thrive with increased provision of loans and advances to the players in those sectors.

For Nigerian commercial banks to have obliged the CBN, the monetary regulatory authority set the pace. In a number of ways, the CBN, through its development functions, injected huge sums of money into the Nigerian economy.

The agriculture sector is a major beneficiary of the CBN’s development finance. There is a Commercial Agriculture Credit Scheme. Other development functions of the CBN to the agriculture sector came in the forms of the Commercial Agriculture Credit Scheme (CACS), Agricultural Credit Support Scheme (ACSC), and Anchor Borrowers Programme through which the CBN has disbursed billions of naira to farmers to boost local sufficiency in rice production and other essential crops.

In further emphasising the relevance of credit to businesses, we should take a look at the development in the nation’s SME sub sector. The small and medium enterprises contribute about half of Nigeria’s gross domestic product. They account for a sizable amount of jobs created in the economy.

However, they usually face a lot of constraints when accessing credit facilities from financial institutions. From asking them to bring collateral and other requirements, they always fizzle out at this point, thus preventing them from contributing their quota to the economy.

Read also: Hobbled by failing economy, Nigeria pins hope on deep seaport to end cargo congestion

Credit facilities are needed for many purposes. It could be to meet up the working capital loan. This usually applies to credit facilities needed on short notice and emergency situation.

There are many ways businesses run into the need of working capital, and if it not provided at that particular time it is needed, opportunities will be missed and the growth of such company will be stunted or may collapse.

Credit facilities are also required to meet fixed asset obligations. Production take place when adequate fixed assets are installed. The use of these fixed assets is also a matter of the level of maintenance available. These fixed assets sometimes stand as collateral when businesses apply for credit facilities.

Notwithstanding, the recent hawkish stance of the CBN will definitely affect businesses in so many ways. With the Monetary Policy Rate at 15.5 percent, the cost of capital will be far higher now than what it was before.

This is because banks are commercial entities, and will add their margin to the benchmark interest rate, indicating that the prime lending rate will now be above 20 percent.

In that case, not many small and medium businesses will have the ability to borrow money from commercial and other banks. Already, businesses are operating under excruciating pains of high cost of operations such as electricity bill, diesel cost, and others.

According to the Manufacturers Association of Nigeria, between 2014 and 2021, its members spent N639 billion on alternative energy. This cost of alternative energy keeps rising because Nigeria is unable to resolve the power sector crisis. From January to September 2022, Nigeria’s power generation grid collapsed not less than eight times at a time the price of diesel has skyrocketed.

Nigeria needs to revive the economy in order to create jobs. There are many problems the economy faces, however, one of the low hanging fruits is to expand credit to the real sector at single digit.

It is in the light of this that the increased lending should be sustained. The CBN should ensure the special facilities get to the targeted recipients so as create the desired level of impact. Implementing this will create a huge relief for players in the real and other sectors of the Nigerian economy.