Private Sector Credit

Finance is a fundamental part of most productive economies. It is, to an extent, the lifeblood of an economy, allowing entrepreneurs and businesses take risks to expand their operations or implement new ideas. This importance of finance is true everywhere in the world and is also true in Nigeria. For instance, businesses often list access to finance as one of the key determining factors for their survival.

Typically, the most dominant source of finance is through bank lending. Using the classic definition, banks take money from people who don’t need it now (depositors) and loan it to those who need it now. Of course, there are other ways to finance businesses besides bank lending but it is still the most dominant. Given its importance, one way to measure the health of an economy is to measure how banks give loans. If banks grow their loan books then it means there must be businesses trying to start or expand who are taking these loans, which is a good sign. On the other hand, if banks loan books are not growing or falling then it means that businesses aren’t expanding or are not willing to take loans given the terms. Either way, it’s not a good signal for the economy.

There are caveats of course. It’s not just about banks giving loans to anybody anyhow, but trying to take risks on businesses in a responsible manner. The worst thing banks can do is to give loans to businesses that end up not paying back, and losing depositors money in the process.

At this point, you are probably wondering why I am telling you this story. Well, the data from banks in Nigeria over the last few years has not been particularly exciting. In the twelve months up to September of this year, total private sector credit, that is the amount of loans given by banks and other financial institutions has decreased by about 1.5 percent. If you remove the loans given to the government then the drop is even higher at almost two percent. For context, a two percent drop in private sector credit is equivalent to roughly N316bn. This is much larger than the Central Bank of Nigeria’s anchor borrowers program and the Federal Government’s TraderMoni and FarmerMoni and MarketMoni and AllOtherMoni all combined.
Ironically, even despite the lower loan book, most banks are making more money than ever. GT bank, for instance, grew its profits by over eight percent year on year in the quarter ending in June of 2018 even though its loan book decreased by over ten percent and depositors funds held in the bank increased by ten percent. The story is the same for most other banks. Of course, it is easy to point the finger at the banks but remember, banks are not in the business of losing money, especially money belonging to their depositors who presumably also do not want to lose their money.

So, why are banks not takings bets on the economy? I can think of three reasons but there a likely more. First, the banks are only just recovering from the damage done during the last recession when non-performing loans rose to 14 percent at the end of 2016. A non-performing loan rate of about five percent is advised although there is no particular reason for that number. Either way, a high 14 percent NPL rate may not have been forgotten by the banks.

Second, despite the official monetary policy rate remaining fixed at 14 percent since what seems like forever, the central bank has actually been indirectly tightening, increasing interest rates through its open market operations, all in its efforts to stabilise the US dollar to Naira exchange rate. Of course, as interest rates go up, more and more businesses are priced out of taking loans from banks.
Finally, I think banks’ loan books aren’t growing because the economy is still not that great. In the past three quarters, the growth in the economy has actually slowed. If the economy isn’t looking great then perhaps banks are being extra cautious, but again if banks are not lending then the economy probably won’t pick up. Either way, the signals from the banks imply that policy makers should maybe be worried. We really can’t afford another downturn given that the last one is still very fresh in our minds.