Nigeria’s real sector is in need of more credit

Domestic credit to the private sector by banks refers to financial resources provided to the private sector by other depository corporations (deposit-taking corporations except for central banks), such as through loans, purchases of non-equity securities, and trade credits and other accounts receivable, that establish a claim for repayment. For some countries, these claims include credit to public enterprises.

Different theories have proved that factors that promote investment is a credit to the private sector which has a weightier effect on economic activities than credit to the public sector.

One of such theories is the innovation theory by Joseph Schumpeter which identified banks’ role in facilitating technological innovation through their intermediary role. He believed that efficient allocation of savings through identification and funding of entrepreneurs with the best chances of successfully implementing innovative products and production processes are tools to achieve this objective. (Mckinnon 1973, Shaw 1973, Fry 1988, King & Levine 1993) have supported the above postulation about the significance of banks to the growth of the economy.

And again, studies have shown that the efficient provision of credit has a positive and direct effect on output and employment opportunities while a low level of financial development and its attendant inefficient private sector credit system distorts economic growth.

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Conversely, it will be safer to say the modern economy is a ‘creditdriven economy’. Thus, on this premises, every sector of the economy require credit for divers’ purpose, among other reasons are factors which either improve the quality of outputs or the efficiency with which inputs are transformed into outputs.

So far, for the period of five years (2015 to 2019), the total value of domestic credit by banks to the private sector amounted to N303 trillion according to the National Bureau of Statistics (NBS) data collated and extrapolated by Businessday Research and Intelligence Unit (BRIU). The year on year breakdown shows that the total credit allocated by banks to the private sector increased by 15 per cent from N52.89 trillion to N61.05 trillion in 2016.

However, in 2017, there was a notable decrease from N63.28 trillion to N61.67 trillion and this represented a 3 per cent decline. At the end of 2019, bank credit to the private sector was up by 4 cents as against a decline of 3 per cent recorded in the corresponding quarter 2018.

This increase could be traced to the increase in Central Bank of Nigeria (CBN’S) minimum loan to deposit ratio for commercial banks which was moved from 60 per cent to 65 per cent. The rise in deposit ratio was a regulatory measure stipulated by the apex bank to improve lending to the real sector and also to weather the effect brought by the coronavirus pandemic on households and MSMES.

In a similar trend, total domestic credit to the private sector amounted to a tune of N37.31 trillion for the period ended June 2020, a disaggregated value shows that the banks’ credit to the private sector in Q1 2020 amounted to N18,49 trillion, and that however increased slightly by 2 per cent to N18,82 trillion in Q2 2020.

Out of the shared total of N18.82 trillion credit to the private sector in Q2 2020, oil and gas industry (downstream, natural gas and crude oil refining) accounted for N3.60 trillion. This represented 19.21 per cent, and was followed by the manufacturing sector which got N1.99 trillion or 16.31 per cent. The general services segment also accounted for N1.60 trillion or 8.74 per cent while finance, insurance and capital market segment received N1.32 trillion credit.

The oil and gas sector (upstream oil and gas services) attracted N1.29 trillion in May 2020; Trade and General Commerce attracted N1.25 trillion or 6.55 per cent. During the reference period, credit to the government rose by the highest as this accounted for 7.99 per cent of the shared total.

Thus far, Nigerian banks are somewhat reluctant to lend to businesses among emerging markets, with an average loan-to-deposit ratio below 60 per cent. That compares with 78 per cent across Africa, with 90 per cent in South Africa and about 76 per cent in Kenya, according to the data compiled by Bloomberg.

Across international frontiers, Shawbrook Bank’s loan to deposit ratio on the British market between 2012 and 2016 increased from 74 per cent in 2012 to 102.7 per cent as of 2016 according to Statista.

The breakdown of the credit portfolio shows that oil and manufacturing sector attracted a major share of the credit facility relative to other sectors of the economy. The real sector, a strategic component of an economy that produces and distributes tangible goods and services which require to satisfy aggregate demand in the economy, accounts for less. This could be attributed to the lack of effective credit rating agencies and misalignment among other factors are responsible for banks’ reluctance to lend to the productive sectors of the economy.

The best way to address the paucity of funds to the real sector is through financial reforms and policies that should focus on how to narrow the gap between savings and lending rates. Banks should also be encouraged to lend to the entire economy as opposed to favouring some specific sectors and government should avoid excessive deficit and borrowing from the financial system, which prove to be crowding out private investment.