Private sectors lending and economic growth in Nigeria
In general, domestic credit to the private sector refers to the financial resources provided to the private sector by banks and other financial institutions, majorly, through loans, purchases of non-equity securities and trade credits. The relationship between growth and private sector credit is one that has strong influence on the success of privately own businesses with a ripple effect on the economy.
Effective credit system has direct impact on private consumption. This is evident in the US domestic credit system – where private debt to Gross Domestic Product (GDP) ratio (a country’s national debt to its GDP) as of December 2017 stood at 200 per cent; household debt surges to $13.15 trillion which is equivalent to 70 per cent of GDP. Similarly, as of October 2017, UK private debt to GDP ratio stood at 217 per cent. During the same period, household debt stood at $1.93 trillion. These observations suggest that a robust credit system is necessary for economic growth.
A look into the Nigeria’s domestic credit to the private sector however indicates a sluggish growth in the credit system. There appears to be a substantial gap between domestic lending and private sectors. But on the contrary, credit to the government through purchase of treasury bills and other government securities is on rise. The structure of Nigeria Treasury Bills (NTB) holdings outstanding indicated that commercial banks accounted for 47.11 per cent, compared with 57.74 per cent in 2017.
Domestic credit to private sector as a percentage of GDP
Data from the International Monetary Fund (IMF) on domestic lending to the private sector by banks as a percentage of Gross Domestic Product (GDP), specifies a fluctuating growth pattern from 1960 to 2018, the data also shows a 3-year consistent decline from 2016 to 2018 at annual growth of zero per cent, while average economy growth during the same period stood at o.9 per cent.
During the review period, domestic credit to the private sector as a percentage of GDP recorded an all-time high of 15.68 per cent, and this represents an increase of 11 per cent compared with the preceding year 2015, but fell slightly by 9 per cent compared with corresponding year 2016. This is an indication of low flow of credit from the banking industry to the real sector of the economy which is the strategic sector of the economy that produces and distributes tangible goods and services required to satisfy aggregate demand in the economy.
Also, commercial banks’ loans to small scale enterprises as percentage of total credit stood at 0.29 per cent as at Q4 2018. Lending to this sub-sector of the economy has been low over a reasonable period of time, and this can be attributed to the following:
Current high interest rate – with Monetary Policy Rate (MPR) put at 13.5 per cent; and commercial bank official lending rate ranges between 20 to 25 per cent per annum and micro finance banks charging 40 to 50 per cent as interest rate, thus, this makes borrowing an expensive option for MSMES.
Secondly, because of informality of the sector, banks and other financial institutions tends to focus more on sectors where tangible assets are available for collaterals.
Lastly, lending institutions tend to become more rigid and risk averse in a bid to reduce non-performing loans. Thus, prefers to direct resources to more viable sectors.
Bank credit to the private sector
Commercial bank credit to Micro Small and Medium Enterprises (MSME) and private sector amounted to a total of N15.48 trillion as at Q4 2018. A total of N40.7 billion was allocated to MSMES which represented 0.29 per cent of the total value while private sector got the most funding. Bank credit to the private sector stood at N15.44 trillion in Q4 2018, the value declined by 3 per cent when compared with the preceding quarter in 2018.
Breakdown on banking credit to each sector:
In Q4 2018, N3.55 trillion was allocated to the oil and gas sector, making the sector the highest recipient. Allocation to the sector represented 23.45 per cent of the total loan provided to the private sector by banks and this value was up by 2 per cent when compared with Q3 2018.
The manufacturing sub-sector stood out as the second largest recipient of credit behind the oil sector, the sector got a sum total of N2.23 trillion representing 14.74 per cent of the total credit to the private sector by banks.
The percentage of the total credit allocated to the agricultural sector stood at N610.149 billion representing 4.03 per cent of the total credit, which is a 6 per cent increase when compared with the previous quarter.
Credit facilities to government as at the reference period stood at N1.36 trillion, representing 9 per cent of the total bank credit, while real estate accounted for 4.12 per cent of the total credit. This value declined by 11 per cent from N710.20 trillion in Q3 2018.
Furthermore, credit distribution across all the sectors of the economy showed that education (0.38 per cent); mining and quarrying (0.14 per cent) and transportation and storage (1.92 per cent) got few funds from banks.
Generally, allocation to the service sector for the past 3 years witnessed a downward trend as the sector recorded a decline from N9.33 trillion in 2016 to N8.98 trillion in 2017 representing a 4 per cent decrease. But judging by the sectorial distribution, commercial bank credit to the sector as at the last quarter of 2018 accounted for 55 per cent of the total credit ahead of industry (41 per cent) and agriculture (4 per cent).
Conclusively, it is important to note that the performance of the real sector is greatly influenced by credit to private sector, because of its strategic importance in stimulating and improving the general well-being of the country at large. Enhancing credit flow to the sector will translate to improved economy.