Bank credit rises despite CBN tightening stance

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Net Domestic Credit (NDC) of Nigerian banks, consisting of loans to the private sector and government, has maintained a steady increase, reaching a record high of N61.19 trillion in August 2022, despite monetary policy tightening by the Central Bank of Nigeria (CBN).

Data obtained from the CBN shows that the NDC increased by 33.02% year-on-year from 46 trillion naira in August 2021.

On a monthly basis, it increased by 2.05% from 59.96 trillion naira in July 2022.

A breakdown of credit allocation revealed that credit to government hit a record high of N21 trillion in August from N20.11 trillion in July. Year-on-year, NDC in government jumped 67.06% from 12.57 trillion naira in August 2021.

Credit to the private sector rose to N40.19 trillion in August from N39.85 trillion the previous month. It jumped 20.18% year-on-year from 33.44 trillion naira in August 2021.

The CBN has raised its benchmark interest rate, known as the monetary policy rate, three times in a row this year to 15.5% as part of measures to contain inflation.

Headline inflation in Nigeria accelerated to its highest level in 17 years at 20.52% in August from 19.64% the previous month, according to the National Bureau of Statistics.

Some industry watchers are surprised that credit to the economy is growing, despite the central bank‘s tightening policy.

Taiwo Oyedele, head of tax and business advisory services at PwC, said this could be because banks have been able to mobilize more deposits from customers following the recent increase in deposit rates, especially on savings accounts.

“Rising interest rates and the environment of negative real yields may discourage many investors from taking long-term positions, thus resorting to short-term bank placements, which banks, in turn, extend to the private sector in the form of credit,” he said.

Ayodele Akinwunmi, Relationship Manager, Corporate Banking at FSDH Merchant Bank, said: “Banks continue to support the economy to create jobs and increase GDP. As banks continue to mobilize deposits, they will be able to support viable businesses. »

A recent report by FBNQuest shows that the current level of private sector credit expansion (PSCE) implies a PSCE to GDP ratio of around 23.2%.

“While there is an improvement from the 20% level at the end of 2020, there is still a long way to go in terms of increasing financial inclusion, even from the 38% level for sub-Saharan Africa, which is still weak,” it said.

The report says that this measure of the PSCE covers loans from the entire banking system and not just from depository banks (DMB). It also covers loans from the CBN and public development banks, such as the Bank of Industry, and smaller credit extensions from other banks, such as micro-finance banks and interest-free banks.

According to a closer measure of the PSCE obtained from the CBN Quarterly Statistical Bulletin for the first quarter of 2022, the total PSCE reached N25.3 trillion at the end of March 2022, a year-on-year increase of 20.3%. . This series only covers loans from DMBs.

This leaves a gap of around N14.9 trillion (between total PSCEs and DMB lending), a small proportion of which is partly attributable to the time lag.

Also Read: Rising CBN CRR to mop up bank liquidity by an additional N1.6 billion

However, the large proportion of the difference can be explained by the increasing credit interventions of the CBN and loans from public banks such as the Bank of Industry.

The communiqué from the Monetary Policy Committee (MPC) meeting in September estimated the CBN’s total injections into the economy over the past three years at 9 trillion naira. These include cumulative disbursements of approximately N2.1 trillion under its Real Sector Support Facility and over N1.0 trillion under its Principal Borrower Program, between other intervention programs.

“As our chart shows, the extension of credit to the private sector and other monetary aggregates have continued to rise rapidly in recent months despite the CBN’s efforts to tighten monetary policy to reduce inflation,” they said. said FBNQuest analysts.

The report indicates that government credit growth continues to outpace other monetary aggregates. It rose 67.1% year-on-year in August, following a 65.8% year-on-year gain in July. This contrasts with the average growth rate of around 20.5% year-over-year for the other three measures.

He said the strong expansion in money and credit growth partly explained the MPC’s decision to raise banks’ cash reserve ratio by 500 basis points (bps) to 32.5%, in addition a 150bp increase in the key rate to 15.5%.

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