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According to the “Money and Credit Statistics” for July 2024, released by the Central Bank of Nigeria (CBN) last week, banks’ credit to the private sector increased by N2.29 trillion or 3.13 per cent to N75.48 trillion in July from N73.19 trillion in the previous month.

The data also shows that credit growth to the private sector has generally maintained an upward trend this year. Thus, standing at N76.48 trillion in January, it rose to N80.86 trillion in February before dropping to N71.21 trillion in March.

It then increased to N72.92 trillion and N74.31 trillion in April and May respectively before falling to N73.19 trillion in June.

Also, a breakdown of Money and Credit Statistics data obtained from the CBN indicates that Private Sector Credit Extension (PSCE) generally headed north in 2023.

Sustaining momentum

Specifically, credit extension to the private sector, increased from N41.54 trillion as at the end of January 2023 to N41.75 trillion and N43.01 trillion in February and March respectively.

The data further shows that credit extension to the private sector stood at N43.66 trillion at the end of April; N44.79 trillion at the end of May; N52.81 trillion(June); N56.46 trillion (July); N56.95 trillion (August); N59.51 trillion (September) and N63.57 trillion at the end of October.

The data also shows that although credit extension to the private sector dropped by N3.83 trillion or 6.03 per cent month-on-month, to N59.74 trillion in November, it jumped to N62.52 trillion in December 2023.

Analysts note that banks’ credit to the private sector maintained its momentum despite the CBN adopting a monetary policy tightening stance since May 2022. Indeed, following the CBN’s release of data showing that credit to the private sector declined by 11.93 per cent to N71.21 trillion in March 2024, from N80.86 trillion in February, FBNQuest had predicted that it expected the PSCE to drop further as a result of the tightening stance of the apex bank’s Monetary Policy Committee (MPC).

The firm’s report partly read: “The most recent data from the Central Bank of Nigeria (CBN) shows that Private Sector Credit Extension (PSCE) increased by +66 per cent y/y to N71.2 trillion at the end of March 24.

This marks a deceleration compared with the growth of 94 per cent y/y recorded in the previous month. On a m/m basis, PSCE extension declined by -12 per cent m/m, indicating that previous policy rate hikes by the Monetary Policy Committee (MPC) are starting to be transmitted through the economy.

“Nigeria’s headline inflation has risen rapidly since Dec ’22. The latest headline reading showed an acceleration of 150bps to 33.20 per cent y/y in March. “In response, the CBN has steadfastly resolved to combat persistent inflationary pressures and achieve price stability.

As a result, the committee raised the policy rate to 24.75 per cent, which is the highest level in recent years. “To further address heightened inflationary pressures, the apex bank adjusted the asymmetric corridor of the Monetary Policy Rate (MPR) to +100bps/-300bps (from +100/-700bps), raised the Cash Reserve Ratio (CRR) to 45 per cent from 32.5 per cent, and reduced the Loan-to-Deposit Ratio (LDR) by 15bps to 50 per cent.

“According to the MPC’s personal statement for its March meeting, almost all committee members highlighted the adverse impact of sustained inflationary pressures and price instability on the economy’s recovery.

“Looking ahead, we expect a slowdown in banks’ credit extension to the private sector as the full impact of the MPC’s previous interest rate hikes and other tightening measures continues to permeate the economy.”

But as earlier pointed out, CBN’s data showed that credit to the private sector rose to N72.92 trillion in April 2024 compared to N71.21 trillion in the previous month.

MPR hikes

This is despite the fact that at its meeting held in March, the MPC, intensifying its inflation fight, increased the benchmark interest rate-the Monetary Policy Rate (MPR)- by 200 basis points to 24.75 per cent, changed the asymmetric corridor from +100/-700 to +100/-300 around the MPR, retained the CRR of commercial banks at 45.00 per cent, adjusted the CRR of Merchant banks from 10 percent to 14 per cent and retained the liquidity ratio at 30.00 per cent.

Furthermore, the Committee, at its meeting, held in May, hiked the MPR by 150 basis points from 24.75 per cent to 26.25 per cent, while retaining all the other rates. Interestingly, the MPR hikes failed to stop the inflation rate from rising from 29.90 per cent in

If those in the private sector do not have the needed funds, it means they will have to borrow from banks to support their business obligations

January, to 34.19 per cent in June.

MPC’s rate hike

Thus, at their meeting in July, members of the Committee voted to hike the MPR by 50 basis points to 26.75 per cent, adjust the asymmetric corridor to +500 and -100 basis points around the MPR.

Addressing journalists at the end of that meeting CBN Governor, Olayemi Cardoso, stated that members of the MPC were mindful of the effect of rising prices on households and businesses, and are, “resolved to take necessary measures to bring inflation under control”.

He said: “The committee re emphasised its commitment to the bank’s price stability mandate, and remained optimistic that despite the June 2024 uptick in headline inflation, prices are expected to moderate in the near term.

“This is hinged on monetary policy, gaining further traction in addition to recent measures by the fiscal authority to address food inflation. “In its consideration, the committee noted the persistence of food inflation, which continues to undermine price stability.

“It was observed that while monetary policy has been moderating aggregate demand, rising food and energy costs continue to exert upward pressure on prices development. “Prevailing insecurity in food producing areas and high cost of transportation of farm produce are also contributing to this trend.

“Members are, therefore, not oblivious to the urgent benefits of addressing these challenges, as it will offer a sustainable solution to the persistent pressure on food prices.”

But while the latest Consumer Price Index (CPI) report released by the National Bureau of Statistics (NBS) showed that the CBN’s tightening measures may have started yielding the desired results as inflation fell in July for the first time in well over a year, dipping to 33.40 per cent in annual terms from 34.19 per cent in June, analysts believe that continuing naira weakness will ensure that credit to the private sector will maintain its momentum whether the CBN cuts interest rates or not.

For instance, in a recent chat with journalists, the Director/ Chief Executive Officer · Centre for the Promotion of Private Enterprise (CPPE), Mr. Muda Yusuf blamed weak naira and inflation for the increase in credit to private sector.

He said: “If those in the private sector do not have the needed funds, it means they will have to borrow from banks to support their business obligations. The volatility in the foreign exchange market has forced some customers to borrow more from banks.”

Currency traders note that despite the CBN’s increased intervention in the foreign exchange market, in the last few weeks, the naira has depreciated against the dollar on the official market, dropping to about N1,600 per dollar.

LDR policy

Aside from naira weakness, however, analysts also attribute the robust private sector growth in recent years to policies such as the Loan-to-Deposit Ratio (LDR) and other initiatives introduced by the CBN to encourage DMBs to increase lending to the private sector.

Introduced in July 2019, the LDR policy saw the apex bank increasing the required minimum LDR to 60 per cent effective end of September 2019. It later raised the ratio to 65 per cent and directed lenders to comply with the regulation by the end of December of the same year.

Positive impact

Confirming the positive impact of the LDR policy on credit growth, analysts at Coronation Research in a report released in 2022, said that DMBs’ efforts to comply with the LDR policy resulted in banking sector credit to the economy growing from N15.5 trillion at the end of Q2’19 to N22.04 trillion at the end of Q2’21.

According to the report, the introduction of the policy has also changed the structure of the economy’s loan composition as oil & gas and Real Estate sectors loans now make up much less as a share of total loans than before the directive.

Conclusion

Although the consensus among financial experts is that credit extension to the private sector is likely to continue to grow irrespective of whether there is further monetary policy tightening or not, Nigeria’s PSCE to GDP (2022) ratio, as FBNQuest pointed out in a recent report, is about 24 per cent compared to 38.3 per cent for the broad group of sub-Saharan African peers.