How Nigeria's banks are boosting unsecured lending amid uncertainty

Commercial banks in Nigeria saw a notable rise in unsecured loans to households and corporations during the fourth quarter of 2024, according to the latest Credit Conditions Survey (CCS) released by the Central Bank of Nigeria (CBN).

The survey findings indicate that unsecured loans to households surged by 15.8 points, while lending to corporate borrowers increased by 23.4 points. In contrast, secured lending recorded a slight decline of 1.2 points within the same period.

Secured and unsecured lending are two primary categories of credit that differ in terms of the security provided by borrowers. Secured loans require collateral such as real estate, vehicles, or financial assets that serve as a guarantee for the lender. The collateral mitigates the lender’s risk by providing a fallback option in case the borrower defaults.

Conversely, unsecured loans do not require any form of collateral, meaning lenders must rely on an assessment of the borrower’s creditworthiness, income stability, and financial history to determine loan eligibility and risk.

The CBN, in its survey released on Wednesday, provided insights into the credit conditions for various borrower segments, including households, Private Non-Financial Corporations (PNFCs), Small Businesses, and Other Financial Corporations (OFCs). The report said that the survey findings were based on responses from lending institutions and did not necessarily reflect the official stance of the Central Bank of Nigeria on the broader credit environment.

According to the data, the overall interest rate spreads on both secured and unsecured loans to households, relative to the Monetary Policy Rate (MPR), widened by 13.0 and 11.2 points, respectively, in the fourth quarter of the year. For corporate lending, the spreads on all types of loans relative to the MPR also widened, with the exception of loans to Other Financial Corporations, which experienced a narrowing trend during the same period.

Lenders reported an increase in default rates across all categories of loans in the fourth quarter, reflecting the economic pressures affecting borrowers. The report attributed the reduction in secured credit availability primarily to evolving economic conditions, whereas the increase in unsecured lending was largely driven by banks’ market share objectives, suggesting that financial institutions were actively expanding their lending portfolios despite the prevailing economic uncertainties.

The CBN’s money and credit data revealed an expansion in credit to the private sector. Bank lending to private businesses and individuals reached N75.96 trillion in November 2024, marking a substantial increase of 27.3 percent compared to N59.68 trillion recorded in November 2023. On a month-on-month basis, private sector credit grew by 2.6 percent from N74.07 trillion in October 2024. This trend indicates a growing reliance on credit to sustain business operations and economic activities amid a challenging fiscal landscape.

Similarly, credit to the government witnessed a sharp rise, climbing to an unprecedented N39.61 trillion in November 2024. This represents a year-on-year increase of 54.4 percent from N25.66 trillion in November 2023. On a monthly basis, government borrowing also saw a marginal increase of 0.6 percent from N39.39 trillion in October 2024. The significant growth in government credit points to the increasing fiscal pressures and the reliance on borrowing to finance public expenditures.