Less Funds For Private Sector As Banks’ Credit To Government Rise By 16%

Banks’ credit to the government (net) increased by 16 percent Year-on-Year (y/y), to N14.27 trillion in January 2022 compared to N12.30 trillion in the corresponding period, data from the Central Bank of Nigeria (CBN) indicated.

On a month on month basis net credit to the government went by 7 percent from N13.32 trillion in December 2021, the CBN data show.

This can be attributed to the increased participation of banks in the last Treasury Bills and FGN Bonds auctions, said Ayodeji Ebo, head, retail investment, Chapel Hill Denham.

Also, the federal government has allotments significantly higher than the amount offered. The implication, he said, are less funds for the private sector and available funds will be at a higher lending rate to the private sector.

Additionally, this will also reduce banks participation in commercial papers issued by the corporates. As long as the bank has attractive and safe investment alternatives, there can’t be any rise in lending to the private sector due to the higher inherent risk, Ebo said.

Taiwo Oyedele, head of Tax and Corporate Advisory Services at PwC, said the increase in bank credits to government relative to the private sector may be as a result of the expiration of tax waivers on corporate debt instruments as well as the heightened credit risks due to rising costs, liquidity challenges and margin pressures.

If the government is crowding out the private sector, he said it will be difficult to sustain the current economic recovery which is built largely on the back of private sector investment. If the trend continues, Nigeria may experience lower than expected GDP growth rate in 2022, Oyedele said.

The CBN data on money and credit growth shows that total credit to the private sector increased by 15.7 percent y/y to N35.4bn. Although growth has slowed since November of last year, the double-digit growth rate is encouraging, said FBNQuest.

A narrower measure of PSCE is captured in another series in the CBN’s Quarterly Statistical Bulletin which covers only lending by deposit money banks (DMBs). It shows a total of N21.8 trillion at the end of September 2021, representing 17.8 percent y/y growth.

The gap of almost N14 trillion can be partly explained by the four-month lag and increased disbursements by the CBN under its development finance initiatives, FBNQuest noted in its latest report on private-sector credit extension (PSCE).

According to the report, despite the double-digit PSCE growth rate, there is still a gap in the number of people who benefit from formal financial intermediation. Nigeria’s PSCE/GDP ratio improved marginally to 20.1 percent in January from 19.8 percent a year earlier based on FY 2021 GDP data.

In contrast, data from the World Bank for 2020 show comparable ratios of 107.9%, 32.0%, and 27.1% for counterparts such as South Africa, Kenya, and Egypt.

South Africa’s high percentage reflects the country’s progress in financial intermediation and the development of its banking sector. A PSCE/GDP ratio of 70 percent is considered an acceptable ratio for a well-developed financial system.

In Kenya, product offerings that arose from collaborations between mobile network operators and banks have helped to drive financial intermediation.

One such product is M-Shwari, a paperless banking service provided by a commercial bank through M-Pesa that allows customers to obtain loans despite them having no prior banking history.

Back to Nigeria, recent partnerships between commercial banks and fintechs have the potential to expand credit access and financial inclusion.

“This is expected to be facilitated by the CBN’s endorsement of open banking, which allows banks to integrate with fintechs and other third parties through Application Program Interfaces (APIs) as the primary means of connectivity and data sharing,” analysts at FBNQuest said.