Market News

BY Wasiu Alli 

Demand for credit by businesses and consumers in Africa’s most populous nation is expected to rise as a sharp decline in inflation rate increases bets on a much-awaited monetary easing cycle.

Analysts and industry data suggest that a potential shift in the monetary policy stance could trigger a surge in loan demand, supporting economic activity in key sectors after multiple interest rate hikes slowed business expansion.

According to analysts at FBNQuest Merchant Bank, the steep fall in consumer prices to 23.18 percent in February from an average of 32 percent last year means policymakers may begin a gradual easing of monetary policy conditions this year when it meets on May 19th and 20th 2025.

“We expect to see increased demand for credit by all classes of borrowers, reflecting the gradual recovery of household consumption and improved business conditions,” the analysts said in a note on Friday,.

They added that the ongoing recapitalisation process of the banking industry is also expected to increase banks’ lending capacity and support credit availability.

According to the recently released monthly economic report by the Central Bank of Nigeria (CBN), sectoral credit utilisation increased by N0.7 billion month-on-month (m/m) to N59.0 trillion in November 2024.

Meanwhile on a year-on-year basis, the total supply of credit to the critical sectors of the economy was more pronounced, representing an increase of N17.4 trillion compared with N41.7 trillion recorded in the year-earlier period.

The report showed that the services sector – the biggest contributor to the Nigerian economy – remained the largest recipient of credit, accounting for 53.9 percent of total credit at N31.8 trillion, amounting to a y/y and m/m increases of 46 percent and 4 percent, respectively.

Within the sector, credit allocation to the financial, insurance and capital markets increased slightly to N7.5 trillion in the period under review from N7.5 trillion in October.

The CBN data indicated that the industrial sector was the second-largest beneficiary of credit allocation at N24.5 trillion, accounting for about 41.5 percent of the total credit.

However, the agricultural sector received the smallest credit extension in November accounting for a meagre 4.5 percent of the total credit at N2.7 trillion. The sector’s growth has remained constrained, with an average growth rate of 1.1 percent over the past eight quarters.

The sector’s growth has been largely constrained by some structural and climatic factors such as security concerns, infrastructure deficits, climate challenges, low mechanisation and harvest losses.

The CBN has however signaled a possible reduction in benchmark interest rates, following a period of aggressive tightening aimed at curbing inflation.

With inflationary pressures showing signs of easing and the need to stimulate economic growth becoming more pressing, a shift towards a lower interest rate regime is anticipated.

“If the CBN follows through with an accommodative stance, we could see prime lending rates drop from the current average of 27.5% to around 24–25% by year-end,” said an economist at a Lagos-based investment firm.

Corporate and consumer lending to benefit

A lower interest rate environment could ease borrowing costs for businesses, particularly in manufacturing, trade, and services. The latest CBN Credit Conditions Survey indicates that commercial banks expect higher demand for business loans in Q2 2024, driven by lower borrowing costs and improved economic sentiment.

Similarly, consumer lending—especially for mortgages, auto loans, and personal credit—could see a boost. Data from the CBN shows that consumer credit grew by 26.29% to N4.4 trillion in November 2024 up from N3.5 trillion as inflation pushes consumers to credit.

But with inflation slowing and key benchmark interest rates on the cusp of decline, the tide is expected to change, allowing for more borrowing at a rather lower rate.

“Banks are already adjusting their risk appetite, with more flexible terms for high-quality borrowers,” said a senior executive at one of Nigeria’s tier-one banks. “We anticipate increased loan approvals in retail and SME segments.”

Despite the optimism, structural bottlenecks in Nigeria’s credit market remain a source of concern. High non-performing loan (NPL) ratios, currently at 5.1% as per a report by World Bank, pose a risk to aggressive lending expansion.

Additionally, the effectiveness of monetary easing will depend on the government’s ability to stabilise the naira and control fiscal deficits.

“For credit demand to translate into sustainable economic growth, we need complementary reforms in exchange rate stability and fiscal discipline,” cautioned a financial analyst at Afrinvest.