November 30, 2020/Proshare

by FBNQuest Research

Net domestic credit to the private sector increased by 12.4% y/y to NGN29.06trn at end-October according to the CBN. Its rate of growth has slowed for two successive months, and has actually gone into reverse on a m/m basis. Our own explanation is that most deposit money banks (DMBs) have reached the minimum 65% threshold for the loan-to-deposit ratio set by their regulator (the CBN). This is also our take from the data on aggregate domestic credit that is cited in last week’s communique from the monetary policy committee (MPC). The y/y growth in the series is at least ahead of nominal GDP growth, so the credit/GDP ratio, one of the weaker points in the Nigeria macro story, is improving. 

The MPC (and CBN) view the rise in private-sector credit extension (PSCE) as one reason for their bringing forward Nigeria’s forecast emergence from recession to the current quarter (Q4). Another is the recent discovery of successful vaccines for Covid-19, which has improved prospects for the external demand for crude oil to Nigeria’s obvious benefit.

The latest figure for lending by DMBs at end-June is NGN10.2trn short of the total mentioned above from its broader series, on which our chart is based. The gap can probably be accounted for by the CBN’s increasing role in development finance and lending by state-owned development banks, primary mortgage issuers and microfinance houses. The recapitalized Bank of Industry alone had an outstanding book of loans and advances of NGN770bn at end-2019. Other state-owned banks are in the process of seeking additional capital.

The series for lending by DMBs by sector shows that loans to manufacturing rose by 32.4% y/y to NGN3.07trn in June, to general services by 62.1% to NGN1.64trn and to agriculture by 42.1% to NGN900bn.

The difference between the M2 and M3 measures of money supply consists mostly of CBN bills with money holding sectors. It has narrowed sharply this year, which is consistent with the fact that the CBN is holding less frequent and smaller open market operations.

The CBN’s broader series also tells us that net credit to government soared from NGN3.76trn in October ’18 to NGN9.09trn one year later, and then expanded much more slowly to NGN10.45trn in October ’20. 

We might have expected that Nigerians would raise their holdings of cash during life with Covid and the same series gives us some evidence. Currency outside banks increased by 23.7% y/y in October to NGN2.10trn.  

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

Source: CBN;  FBNQuest Capital Research