Still Very Weak Lending to the Real Economy


Wednesday, June 24 , 2020 / 10:10 AM / by FBNQuest Research / Header Image Credit


Private-sector credit extension again grew in April in double digits y/y, at a respectable 15.7%. This is happily a little ahead of nominal GDP growth. Since the private-sector credit/GDP ratio remains below 20%, compared for example with over 75% in South Africa, the monetary authorities will be looking for similar growth over many years. A low ratio has obvious implications for monetary policy and economic development, not forgetting bank stock valuations. In contrast, credit to the government rose by 30.3% y/y in April and has more than doubled in just two years.

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The monetary policy committee last month pointed to an increase of N3.1trn or 20.5% in credit extension since July 2019. It identified the CBN's steady increases in the minimum loan-to-deposit ratio (LDR) as the driver.


A separate CBN data series puts DMBs' lending to the private sector at N17.2trn at end-2019. This is about N9.5trn short of the total for December in its broader series, on which our chart is based. We would explain the difference as partly due to lending by the state-owned development banks. The recapitalized Bank of Industry alone reported loan and advances of N730bn at end-2019.


Banks have been debited three times this year by the CBN, most recently last Friday, for breaches of the LDR and/or the cash reserve requirement. This is a case of treading a fine line: too many debits and two much liquidity removed from the market, and a challenge in selling FGN paper and CBN bills at auction.


Money and credit indicators (% chg; y/y)

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Sources: CBN; FBNQuest Capital Research


The difference between the M2 and M3 measures of money supply consists of CBN bills held by money holding sectors. These would cover bills issued within its open market operations (OMO). The difference at end-April was N3.94trn, compared with N7.64trn at end-October. The sharp decline is consistent with the exit of offshore investors in OMO bills.


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