Credit To Private Sector Crosses N80trn Amid Weakening Currency, Double DigIt-inflation

Nigeria’s private sector received N80.86 trillion in credit from the banking industry in February 2024, a 93.66 per cent Year-on-Year growth from N41.75 trillion reported in February 2023, the latest data from the Central Bank of Nigeria has shown.

On a Month-on-Month growth, the “Money and Credit Statistics” by CBN showed that credit to the private sector gained 5.99 per cent or N4.57 trillion MoM from N76.29 trillion in January 2024 amid the unification of the naira policy of the apex bank and double-digit inflation rate.

InsideBusinessNG gathered that credit to the private sector in 2023 rose to N62.52 trillion, a growth of 50.49 per cent or N20.98 trillion from N41.54 trillion reported by the CBN in January 2023.

According to analysts, the reported N80.86 trillion credit to the private sector in February 2024 is on the backdrop of the weakening of the naira at the foreign exchange market and 31.7 per cent inflation rate, stressing that bank customers were lending to big corporations to meet the 65 per cent Loan-to-Deposit Ratio (LDR) threshold of the CBN.

An investigation by InsideBusinessNG showed that Naira at the Nigerian Foreign Exchange Market (NAFEM) closed in February 2024 at N1,544.081 per dollar from N899.39 against the dollar it closed in December 2023.

Nigeria’s annual inflation rate soared to a fresh 1996-high of 31.7 per cent in February 2024, up from 29.9 per cent in January 2024, mainly due to the effects of oil subsidy removal and devaluation of the naira.

Between June 2023, when the foreign exchange market was liberalized, and mid-February 2024, the naira depreciated by 69 per cent, leading to a considerable rise in import costs and significantly impacting Nigeria’s import-dependent economy.

The CBN has updated its Cash Reserve Requirement (CRR) mechanism, making banks with minimum LDR below requirement face a 50 per cent lending shortfall. The policy which was set to improve lending to customers to stimulate the real sector of the economy, implies that for every N100 received as deposits, the banks are to lend N65 to customers.

The apex bank had in a circular to banks stated that it would resume the enforcement of the LDR policy effective July 31, 2023.

Also, CRR is one of the monetary policy tools the CBN uses to limit the circulation of money or supply in the economy, as banks’ liquidity drops. In the last monetary policy committee (MPC) meeting of the CBN in July 2023, the CRR was retained at 32.5 per cent.

However, the Acting Director of the Banking Supervision Department, CBN, Adetona Adedeji in a circular to all Deposit Money Bank (DMBs) said, the apex bank is halting its daily CRR debits and will be adopting an updated CRR mechanism that is intended to facilitate bank capacity for planning, monitoring and aligning with records with the CBN.

According to him, the determination of the segment of deposits subject to sterilization with the CBN as CRR will follow the processes outlined that “utilization of the incremental Approach: the extant ratios commercial banks 32.5 per cent and merchant banks 10per cent will be applied to increases in the bank’s weekly average adjusted deposits.”

The second phase is that a “CRR levy of 50 per cent of the lending shortfall will be enforced for banks that do not meet the minimum LDR as per our correspondence to all banks referenced BSD/DIR/GEN/LAB/12/049 dated September 30, 2019.”

He stated that the CBN will provide the bank with details of the applied charges and their underlying computation rationale.

Commenting on the credit to private sector growth, the Director/Chief Executive Officer · Centre for the Promotion of Private Enterprise (CPPE), Muda Yusuf explained that bank customers now need more money to fund their foreign exchange commitments.

According to him, “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 has forced some customers to borrow more from banks and it is responsible for the huge N80.64 trillion credit to the private sector in February 2024.”

The Vice President of Highcap Securitas Limited, David Adnori also alluded to the growth to depreciation of the naira, stressing that a lot of big corporates have to access funds from the banks in a move to meet the supply of their inputs.

According to him, “It is obvious that credit to the private sector is expected to increase in January amid macroeconomy challenges. The weakening of the local currency has given more room to borrow from banks.”

In addition, the Head, of Financial Institutions Ratings at Agusto & Co, Ayokunle Olubunmi attributed the growth of credit to the private sector in February 2024 to the devaluation of the naira and the 65 per cent LDR policy of the CBN.

“Between December 2023 and January 2024, we witnessed a significant fall in Naira. If you look at credit to the private sector in naira terms, the dollar exposure could have been included.

“In Q3 2023, banks were trying to increase their lending to the real sector in a move to boost their LDR and ultimately reduced the amount of debt they will be getting from CBN as a penalty. After the election in 2023, banks understand the economy better which makes it easy for banks to grant credit. All these impacted credit to the private sector,” Olubunmi said.

He added that the credit to the private sector is expected to increase further in 2024.

“Banks with LDR below 65per cent benchmark will want to grant more credit to the private sector to escape CBN’s sanction,” he said.