Banks’ credit to the private sector surged by 34 percent, reaching N75.48 trillion in July, up from N56.46 trillion in the previous year, according to the latest data from the Central Bank of Nigeria (CBN).
On a month-on-month basis, credit to the private sector increased by approximately N2.29 trillion between June and July.
This credit to the private sector (CPS) encompasses loans, trade credits, and other account receivables extended by banks within a specific period. CPS is a crucial indicator of the banking sector’s balance sheet strength and its contribution to the national economic agenda.
Experts suggest that an increase in private sector credit significantly boosts the economy, as there is a strong correlation between such credit and economic growth.
Analysts at Cordros Capital predict that credit to the private sector will likely continue its upward trend. They attribute this to the CBN’s reinforcement of the limit on Deposit Money Banks’ loans-to-deposits macro-prudential ratio, which is expected to sustain commercial banks’ willingness to create risky assets in the short to medium term. However, they also caution that the CBN’s tightened monetary policy measures could influence the scale of growth going forward.
A CBN study revealed that credit is growth-enhancing, even in environments with low trade openness, monetary policy challenges, investment climate concerns, and inadequate infrastructure. The study confirmed that increased private sector credit leads to economic growth.
The strength of banks’ balance sheets also plays a critical role in the flow of credit. The ongoing rise in lending, despite macroeconomic challenges, underscores the resilience and stability of Nigerian banks.
In a study titled “Balance Sheet Strength and Bank Lending During the Global Financial Crisis,” researchers from the International Monetary Fund examined how the strength of banks’ balance sheets impacts the transmission of financial sector shocks to the real economy.
Dr. Muda Yusuf, Chief Executive Officer of the Centre for the Promotion of Private Enterprise, noted that while the credit outlook remains positive, there are concerns regarding the distribution of credit across different sectors and companies. He emphasized the need for more inclusive credit access, particularly for small businesses, which are vital for job creation and economic inclusion. Yusuf pointed out that banks often exercise caution due to credit risk concerns when lending to small businesses and certain sectors. He called for efforts to ensure stable and inclusive credit access across all sectors, especially those with high potential for growth and employment, such as agriculture, manufacturing, real estate, mining, and construction.
Meanwhile, a CBN report highlighted a substantial increase in bank deposits during the first half of the year. Demand deposits grew from N26.7 trillion at the end of December 2023 to N33 trillion by June 2024.
Banks maintained steady growth in deposits across the quarters. Total demand deposits in the first quarter increased by 8.1 percent to N28.9 trillion and further rose by 14.3 percent to N33 trillion in the second quarter of 2024.
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Financial analysts believe that banks are well-positioned to continue creating new loans, citing aggressive growth strategies and a supportive regulatory environment as key factors.
