Nigeria’s Accelerating Growth Trajectory under Threat by Weak Bank Lending

As the Nigerian economy continues to accelerate, analysts have cautioned that weak Bank lending, especially to the real sector may derail projected growth trajectory.

“The main challenges for investors are on the front of liquidity. How can Nigeria increase liquidity in the near future? Nigeria is looking better on most metrics, having accelerated growth, a stable currency and rising FX reserves, but needs to improve on Bank lending which remains weak,” Charles Robertson, Global Chief Economist, Renaissance Capital said.

According to data from the National Bureau of Statistic (NBS), bank credits to the private sector declined by 2.5 percent (year-on-year) to N15.6 Trillion in the first quarter of 2018 from N16 Trillion in the first quarter of 2017.

Analysts have said that weak bank lending which is already lowering productivity and output in the real sector may eventually lead to inflation if not checked.

First quarter 2018 GDP has declined to 1.95 from 2.11 in Q4 2017; important sectors of the economy that employs the most labour are either contracting or growing slowly. The agricultural sector contribution to GDP notably dropped by 4.48 percentage points to 21.65 percent in Q1 2018 from 26.13 percent in Q4 2017 and trade contribution still remains in the negative territory.

“Bank lending is mostly to the Government rather than to the private sectors, so if you are relating lending to output, it means output has actually suffered significantly and that could be the cause of inflation. The problem is not really price inflation as a result of excess demand, the fundamental problem is that of productivity and output,” Bismarck Rewane, CEO, Financial Derivatives Company Limited said.

Godwin Emefiele, Governor of the Nigerian Central Bank CBN during the Monetary Policy Committee (MPC) meeting held on Tuesday noted that the CBN is creating innovative ways to improve bank lending to the real sector of the economy.

Emefiele said, “We will try as much as possible to come up with some credentials that will relate loan deposit ratio with the level of cash reserve that the Banks hold. For Banks that have done a lot of work in increasing their loan deposit ratio we will be compensating them with cash reserve ratio (CRR) and penalize those who prefer to keep liquidity and trade on Government securities or direct them to the FX market rather than grant loans to the real sector.”

Analysts have however expressed divergent opinions. Liquidity will most likely come from three sources, Government budget, elections spending, and the expected increase in minimum wage and they have the potential to drive inflation higher. In terms of output, should liquidity in the Banking sector increase as a result of lower Cash Reserve Ratio (CRR), the only way it can have positive impact on growth is if Banks lend more to the private sector,” Ibrahim Tajudeem, Head of Research, Chapel Hill Denham said on phone.

“The only way we can see an improvement in growth is if Banks lend more to the private sector and the CBN seem to be ready to make that happen via regulation even though that should not happen as Banks should lend based on their calculated risks factors and that should support economic growth.”

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