New Telegraph

Private sector credit growth sustains momentum amid policy tightening

According to the Central Bank of Nigeria’s (CBN) latest “Money and credit statistics” data, credit extension to the private sector – also known as Private Sector Credit Extension (PSCE)- increased significantly by N17.99 trillion or 43.11 per cent to N59.74 trillion at the end of November compared with N41.74 trillion at the end of 2022. 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 from N63.57 trillion in October, it has generally maintained an uptrend in the last two years. A breakdown of the data for the first eleven months of last year indicates that 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. However, as several financial experts have pointed out, credit extension to the private sector has been expanding in the last two years despite the CBN adopting a monetary policy tightening stance since May 2022 as part of its efforts to fight surging inflation.

MPR hikes

In fact, since voting to raise the benchmark interest rate – the Monetary Policy Rate (MPR)- to 13 per cent in May 2022, members of the apex bank’s Monetary Policy Committee (MPC) have consistently increased the MPR, hiking it to 18.75 per cent at the last MPC meeting held in July 2023. Analysts attribute the continued expansion in credit extension to the private sector despite the frequent hikes in MPR to policies such as the Loan-to-Deposit Ratio (LDR) and other initiatives introduced by the CBN to encourage Deposit Money Banks (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. The CBN stated that failure to comply with the directive will result in a levy of additional Cash Reserve Requirement (CRR) equal to 50 per cent of the lending shortfall of the target LDR.

CRR cut for Merchant Banks

However, following complaints in some quarters that some lenders were finding it difficult meeting the 65 per cent LDR, the CBN approved a reduction in the CRR of Merchant Banks to 10 per cent from 32.5 per cent in July. In a circular, the regulator explained that the reduction in the CRR was aimed at boosting lenders’ ability to provide more credit for infrastructure projects, real estate, and other long-term financing needed to support the development of the Nigerian economy.

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. Similarly, a member of the MPC, Professor Aliyu Sanusi, said in his personal statement at the meeting of the Committee held in July, that “a review of the banking system stability report shows that the banking system continues to remain safe, sound, and resilient. Capital Adequacy Ratio (CAR) stood at 11.2 per cent as of end-June 2023, which was above the regulatory minimum of 10 per cent. The Non-Performing Loans (NPLs) ratio was 4.1 per cent, which was below the regulatory maximum of five per cent. Furthermore, Liquidity Ratio stood at 48.4 per cent, above the regulatory minimum of 30%. Data also shows that the banking industry’s Total Assets and Gross Credit to the economy have maintained their upward trends in June 2023. “Total industry assets grew yearon-year by N30.92 trillion or 47.21 per cent to N96.4 trillion between end-June 2022 and end-June 2023. The upward trend in total credit to the economy stands at N37.81 trillion as of June 2023 and has increased by N10.75 trillion or 39.73 per cent between the end of June 2022 and the end of June 2023. The credit growth has continued since 2019 following the bank’s Loan-toDeposit Ratio (LDR) policy.”

In addition, the then Deputy Governor in charge of Economic Policy at the CBN, Dr. Kingsley Obiora, also said in his personal statement at the MPC meeting that, stated: “The financial soundness indicators showed that the banking system remained stable and resilient. The capital adequacy ratio (CAR) and Liquidity Ratio (LR) have remained above the minimum thresholds. Although CAR decreased to 11.2 per cent in 2023 from 14.1 per cent, it remained above the 10.0 per cent prudential requirement. The liquidity (LR) was also above the 30.0 per cent regulatory minimum ratio. It increased significantly from 42.6 per cent in June 2022 to 48.4 per cent in June 2023. “The Non-performing Loans (NPLs) ratio remained below the maximum prudential requirement of 5.0 per cent. It declined from 5.0 per cent in June 2022 to 4.1 per cent in 2023. The continuous decline in NPL was attributable to write-offs, restructuring of facilities, Global Standing Instruction (GSI) and sound credit risk management. “Total assets of the banking industry grew by N30.92 trillion or 47.21 per cent between June 2022 and June 2023, largely driven by the effects of new FX policy. As a result, total gross credit increased by N10.75 trillion or 39.73 per cent between the end of June 2022 and the end of June 2023 due to the increase in the industry funding base, the CBN’s directive on Loan-to-Deposit Ratio (LDR), business strategy and competition, and changes in valuation of FX denominated loans due to operational changes in the FX market. The credit growth was largely recorded in oil and gas, manufacturing, general commerce, and government.” Also, in a report, released last week, FBNQuest Research highlighted the expansion in credit extension to the private sector despite the CBN’s implementation of various restrictive measures. The firm stated: “According to the most recent data from the Central Bank of Nigeria (CBN), Private Sector Credit Extension (PSCE) increased significantly by 44 per cent y/y to N59.7 trillion as at Nov ’23. PSCE also expanded by 43 per cent over the eleven-month period to Nov ‘23. The data covers lending by the entire banking system and not only the deposit money banks (DMBs), which accounts for 69 per cent of the total figure. Specifically, the data reflects lending by the CBN and state-owned development banks, such as the Bank of Industry, and smaller credit extension by other banks, including microfinance banks and non-interest banks. “Credit extension to the private sector and other monetary aggregates have continued to expand despite the CBN’s implementation of various restrictive measures, including the return of Open Market Operation (OMO) auctions, Cash Reserve Requirement (CRR) debits, removal of the N2.0 billion cap on Standing Deposit Facility for DMBs, and adjustment of the asymmetric corridor of the MPR to (+100/-300bps) from (+100/-700bps previously).”

More MPR hikes expected

Citing inflation’s surge to 28.92 per cent in December as well as the continuous expansion of money supply, FBNQuest Research said it expected the MPC to “continue to raise interest rates to sustain its efforts in combating inflationary pressures.” Specifically, it predicted that “the committee will raise the MPR by around 25-50bps at its next meeting.” In a report released over the weekend, FSDH Research, an arm of FSDH Merchant Bank Limited, forecast that the MPR could hit 19 per cent in the first half of this year compared with 18.75 per cent at the end of 2023. It, however, said it expects that the MPR “will be adjusted downwards as the inflation rate declines in H2.” According to the firm, the inflation rate is likely to average 27.9per cent in 2024 compared with the 2023 average of 24.5 per cent. It also said that key challenges such as insecurity, logistics bottlenecks and infrastructure deficit will linger in 2024, thus raising business costs, adding, however, that it expects the inflation rate, “to trend downwards in H2’24 as fiscal authorities will intensify their efforts to address some of these challenges.”

Conclusion

While the consensus among financial experts is that credit extension to the private sector will continue to grow despite further monetary policy tightening, analysts at FBNQuest had pointed out in a report last year that “Nigeria’s Private Sector Credit Extension (PSCE) to GDP (2022) ratio is approximately c.24 per cent. This compares with 38.3 per cent for the broad group of sub-Saharan African peers based on data from the World Bank.”

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