Culled—Proshare

June 9, 2020

by FBNQuest Research

When we allow for the prevailing subdued household demand and declining GDP per head, we may feel that double-digit growth in private-sector credit extension is a reasonable achievement. Indeed, the figure in March rose to 17.9% y/y and thus comfortably above the rate of nominal GDP growth: the monetary authorities will be looking for similar growth over many months, however, since private-sector credit/GDP remains below 20% of GDP. In contrast, lending to the government rose by 25.7% y/y in March and has more than doubled in just two years.

The monetary policy committee (MPC) 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) for deposit money banks (DMBs), to 65% as at end-December, as the driver.

A separate CBN data series puts DMBs’ lending to the private sector at N17.2trn at end-2019. This is about N11trn short of the total in its broader series, on which our chart is based. The additional three months would help to account for the difference, as would the acceleration in lending by the state-owned development banks, notably the recapitalized Bank of Industry.

Banks have been debited three times in nine months by the CBN 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 there follows a challenge in selling FGN paper and CBN bills at auction.

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

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-March was N4.79trn, compared with N7.37trn at end-September. The pronounced fall is consistent with the exit of offshore investors in OMO bills.