The Central Bank of Nigeria (CBN) has revealed a notable reduction in loans extended to the private sector, with credit dropping to N71.21 trillion in March.
This figure reflects a significant month-on-month decline of 11.93 percent or N9.65 trillion compared to February’s record of N80.86 trillion. Despite this decrease, credit to the private sector saw a substantial year-on-year increase of 65.57 percent from N43.01 trillion in March 2023.
In contrast, credit to the government also experienced a decline, dropping to N19.59 trillion in March from N33.93 trillion in February, representing a month-on-month decrease of 42 percent. However, on a year-on-year basis, credit to the government rose by 28.8 percent compared to N27.52 trillion recorded in March of the previous year.
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These declines in credit to both the private sector and government are attributed to the CBN’s ongoing monetary tightening measures. The CBN has implemented ten consecutive interest rate hikes since May 2022 to curb inflation, with the Monetary Policy Rate (MPR) currently standing at 24.75%, up by 200 basis points from the previous rate of 22.75% set in February.
Furthermore, the CBN’s downward review of the loan-to-deposit ratio (LDR) from 65 percent to 50 percent in April is aligned with its monetary tightening stance. The LDR is a critical metric used to assess a bank’s liquidity by comparing its total loans to its total deposits. While increasing the LDR allows banks to extend more credit to businesses and individuals, a decrease in the ratio limits their ability to loan customers using depositors’ funds.
The Lagos Chamber of Commerce and Industry (LCCI) has voiced concerns over the adverse effects of high interest rates on the economy, particularly on the private sector. Dr. Chinyere Almona, the Director-General of LCCI, highlighted the impact of these rates on diverting funds away from business expansion and development, especially for Small and Medium Enterprises (SMEs).
“The recent hikes in the MPR have directly translated into higher interest rates, making it more expensive for businesses to access credit for working capital, expansion, and sustainability.
“We have consistently advised that rate hikes alone will not curb inflation without resolving challenges of the real sector of the economy,” she said.
The CBN has been aggressively issuing Treasury bills since the first quarter, with interest rates ranging between 19% and 22%, nearly aligned with the Monetary Policy Rate (MPR) of 24.75%. This move was aimed at mopping up excess liquidity in the economy to curb inflation.
While recognizing the CBN’s efforts in controlling inflation and stabilizing the exchange rate, Dr. Almona emphasized the need to achieve these objectives without stifling private sector growth.
“The real sector has demonstrated the capacity to create more jobs, manufacture products for consumption and export, and sustain the industrial base of the economy.”
“While we understand that high-interest rates attract Foreign Portfolio Investments and local investors to treasury bills and bonds, we lament the drying up of funds away from the private sector to government treasuries,” she said.