Banking Credit to the Private Sector: The Face Behind the Mirror


Monday, February 12, 2018 05.30 PM / Proshare Research  


Introduction: In Need of a Guide Dog

Banking credits to the private sector is guided by the position of the cycle.  Naturally, banks are expected to maintain a robust credit position whenever the cycle is experiencing a boom.


At the same time bank credits become tepid in period of downswing as banks become more risk aversive to the real sector. 


As they reduce the possibility of amplifying non- performing loans, the reluctance to take on more moral hazards gather steam. Therefore, banking credit is regarded as a lagging indicator, the indicator acts in response to the cycle just like unemployment. 


Given the nature of banking credits, they end up being guided rather than act as a guide. Many refer to the indicator as one in need of a guide dog.


Although it’s expected that banks are meant to employ a passive measure in credit creation. In order to diversify risk and also ensure proper cash management.


However, the structure of the economy dictates the manner by which credits are distributed.  In a resource dependent economy coupled with infrastructural deficit.


The resource sector will top the bank’s scale of preference with regards credit creation. In a follow up to the cycle, policy response either from the monetary or fiscal conduit also plays a role in shaping credit creation by banks.


Besides in an economy where the informal sector contributes more than 40% of GDP, credits will be more inclined to rent driven. As deposit money banks hedge against possible cash mismatch risk. 


Net Domestic Credit: Rising Credit Gaps

The net domestic credit at the end of 2017 fell from N 26.85 trillion in Dec 2016 to N 25.86 trillion.  Earlier in the year, net domestic credit enjoyed an upward trajectory, due to government credit.


A reversal became inevitable as the fiscal side signalled the possibility of circumventing the domestic money market. In addition to circumventing the domestic money market, the absorption of long term instrument as a financing mechanism ahead of short term instruments whittled down appetite.  


Long term instrument is repulsive to cash replenishment and could hurt cash management, especially for deposit money banks. After all many concedes Inflation not fully priced in to the long end of the curve: Thus, forcing net domestic credit to fall at the twilight of 2017.  The casualty effect is a swell in credit gap.      


Fig 1: Net Domestic Credit and Credit to Government
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Source: NBS


Banking Credit: Micro Adjustment 

The banking credit stood at N 15.74 trillion at the end of 2017.  Banking credit fell by 2.34% and 0.54% compared to both the previous and corresponding quarter of 2017.  Banking credit to gross domestic product ratio also fell slightly from 0.158 t0 0.155.


The slight dip in financial deepening ratio highlighted the banks growing unease to lend to real sector. Holistically, banking credit to deposit ratio fell from 0.74 in 2016 to 0.71. The improvement in deposit coupled with a risk cautions approach by banks has improved their micro Prudential’s levers.


Such reality highlights the delicate balance between improving micro prudential by banks and bolstering financial deepening in a downswing.


Thus counter-cyclical lending is threatened by on-going efforts by deposit money banks to foster micro prudential and the retention of a high reserve ratio at this point by the Central bank. 


Fig 2: Banking Credit to GDP 
Proshare Nigeria Pvt. Ltd.

Source: NBS, CBN 

Banking Credit to Each Sector:  Stationary or Reshuffling

The total amount of credit to the agricultural sector stood at N528.23 billion, which is a 7.4% increase compare to the previous quarter but slipped slightly on a year on year basis.


The combination of Government’s agricultural policy drive and the Central bank’s anchor borrowing programmed has steered credit to the agricultural sector from slipping.


However, the credit to the agricultural is just 3.4% of the total credit to the private sector.  At the same time it is only 2.3% of the gross domestic product of the Agricultural sector.


The industrial sector gulped 39.6% of the total credits to the private sector, credit to the same sector stood at N 6.22 trillion. However, credit to the industrial sector fell by 0.4% compared to the previous year.


The fall out was due to leaner credit creation to both the manufacturing and mining and quarry sub-sector, underlining inflamed risk aversion to the real sector.   


Fig 3: Credit distribution among sectors as at 2017
Proshare Nigeria Pvt. Ltd.

Source: NBS


The service sector suffered the highest hit as it fell from N9.33 trillion in 2016 to N 8.98 trillion in 2017.  Growing reluctance by banks to lend to sub sectors such as power and energy (servicing), general and storage affected the broader sector. Eventually leading to a 4% fall in banking credit to the same sector. 


Reluctance by banks to create credit to the service sector, the mosaic still reflected the imbalance among the three sectors. Although the duo of agriculture and industrial gained more space on the credit pie chart, the structural factors that impeded credit to such sectors remains and why?


Profound risk aversion suffered by the service sector slightly increased the share of agriculture and manufacturing on the credit pie. However, there was no major rise in credit creation to both sectors.


Holistically there is no substantive reshuffling of credits among the three sectors by banks, the credit pie remains largely stationary.


Credit Across Sub-Sector:  Who Gets What? 


Fig 4: Credit Across Board
Proshare Nigeria Pvt. Ltd.

Source: NBS


The oil and gas sub-sector, was the largest recipient of bank credit to the private sector as it stand at   N4.737 trillion , inclusive of both service and industry bound credit.


Credit to the oil sector represent 30% of the total loans provided to the private sector by banks.


Giving the current dynamic, the balance sheet of banks both directly and directly is exposed to the oil sector.


The present scenario validates the position that banks will be more forthcoming to the resource sector, especially when the economy is oil dependent for its growth.


The manufacturing sub-sector stood out as the second largest recipient of credit behind the oil sector. Credit to the manufacturing sector stands at N2.17 trillion, making it 5% short off 2016.


Fig 5: Credit to GDP or Some Selected Sub-Sectors
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Source: NBS, CBN


Credit provided to the manufacturing sub-sector made up 13% of the total banking credit to the private sector.  The present credit level to the sub-sector is o.25 to its gross domestic product.


The huge ratio is not reflective of robust credit but a lean manufacturing sector.  Presently, the sub-sector is suffering from both structural contours and financial repression.

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Evidently credit penetration is shallow has it ignores the informal sector, especially trade and agriculture.  Thus, a large chunk of the middle and lower base of the pyramid is excluded from taping credit.  



Although credit have been dictated by structural flaws however the current credit blind triggered by  earlier downswing has become the face behind the mirror. A more robust developmental framework which involves both the monetary and fiscal authorities is desperately needed.


Such should be aimed at addressing credit squeeze been experienced by the informal sector coupled while the inherent structural flaws that has held growth back. Obviously, such measures are needed to reverse the growing inequality.     


Certainly, there is an urgency to ensure that banking credit to the private sector do not lag for too long nor lag far behind the cycle. The inability to avoid such could affect the quality of growth moving forward.   


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