By Babajide Komolafe
THE N633 billion upsurge in credit to the private sector in February has been greeted with divergent outlooks for the overall growth in credit to the sector in 2018, with some analysts urging caution while others project continued growth.
Citing the consolidation of the country’s exit from economic recession, reduced domestic borrowing by the federal government and declining yield on government securities as well as the need for banks’ to sustain profitability, some analysts have projected up to 10 percent growth in flow of credit to the private sector in 2018.
Others were, however, less optimistic, stressing that while the above factors are expected to trigger growth in credit to the private sector, the growth may not be as significant as expected, except there is increased momentum in the economy.
Financial Vanguard analysis of the Depository Corporation survey reports by the Central Bank of Nigeria (CBN) for January and February, showed that credit to the private sector rose by N633 billion or 2.88 percent to N22.6 trillion in February from N21.99 trillion in January.
This development sharply contrasts the contraction in credit to the private sector in January and full year 2017. In January, credit to the private sector fell month-on-month (m-o-m) by N300 billion or 1.35 percent to N21.99 trillion from N22.29 trillion in December 2017.
Financial Vanguard analysis of CBN’s Quarterly Economic reports showed that credit to the private sector declined year-on-year marginally by N86 billion or 0.4 percent to N22.29 trillion in December 2017 from N22.38 trillion in December 2016.
However, further analysis of credit growth to the sector in 2017 showed contraction in the first half of the year, when the economy was in recession and expansion in the second half of the year, when the economy had exited recession.
According to the CBN, credit to the private sector contracted quarter-on-quarter (q-o-q), by N102 billion or 0.4 percent in the first quarter of 2017 (Q1’2017). It also contracted in the second quarter (Q2’2017), q-o-q, by N294 billion or 0.6 percent.
But in the third quarter (Q3’2017), and fourth quarter (Q4’2017), credit to the private sector grew by N44 billion or 0.2 percent and N264 billion or 1.2 percent respectively.
Some analysts however opine that the surge in February and growth in the second half of 2017 (H2’2017) may not lead to significant private sector credit growth in 2018.
“While we do expect Deposit Money Banks (DMBs) to continue de-emphasizing federal government lending, we expect a pick-up in loan book growth. However, the pick-up, in our view, will not be significant,” said George Bodo, Head of Financial Research, Ecobank Group.
Bunmi Asaolu, Head Equity Research, FBNQuest Capital, equally noted: “Even with the results for Q1 2018 that have been published by only two banks, it is not easy to explain the monthly changes referred to”.
According to Razia Khan, Managing Director, Chief Economist, Africa and Middle East, Global Research, Standard Chartered Bank, “The February numbers need to be viewed in light of the weakness that preceded that data. This is not yet a robust recovery.
“Given the emergence of the economy from recession, we would expect this to be accompanied by some recovery in credit growth as well. While the policy easing that we anticipate will certainly help, it will require further economic momentum, including passage of the budget, to create more demand for credit,” she added in an email response to Financial Vanguard.
But analysts at FSDH Merchant bank and Cowry Assets Management Limited believe that the 2.88 percent credit surge to the private sector in February is the beginning of a trend that will persist through the year.
“The growth (observed in February) should continue,” Ayo Akinwunmi, Head, Research, FSDH Merchant Bank told Financial Vanguard.
“This is also in line with our expectation for the year 2018. FSDH Research expects credit to grow by 10 percent this year on account of the improvement in the macroeconomic environment in Nigeria.”
According to Johnson Chukwu, Managing Director of Cowry Assets Management Limited, banks have resumed lending to the private sector and this accounts for the surge in February. “Because it is just one month, it would be difficult to use the word trend. My perspective is that it will continue. That is the effect of banks resuming lending to the private sector”, he told Financial Vanguard.
Matured treasury bills
Speaking further, Chukwu said: “The basic thing that has happened is that government has pulled back from borrowing from the financial sector and has paid off about N400 billion in matured treasury bills. The banks are now seeking out for good credit. I am aware that banks’ lending rates have come down and banks are beginning to extend credit to the private sector.
“So the February growth may just be the start of a new trend, that giving the pull back of government from borrowing and availability of liquidity in the banking system, and also the need for banks to sustain their profitability, banks are now considering the private sector as the first beneficiary of their credit expansion unlike when the federal government was the first beneficiary.
“That is why I believe the development is going to continue. The magnitude month-on-month may differ, but I think banks are now focussing on granting facilities to the private sector.”
Lending credence to these robust outlooks is the Credit Condition Survey for Q1’2018, released by the CBN two weeks ago, which indicated increased availability of credit to houselds and corporate entities in the first quarter of the year.
The report stated: “In the current quarter relative to the previous quarter, lenders reported an increase in the availability of secured credit to households. They noted that favourable economic outlook and higher appetite for risk were major factors behind the increase. Availability of secured credit was expected to increase in the next quarter, with higher appetite for risk and favourable liquidity positions as the likely contributory factor.
“Households demand for lending for house purchase decreased in Q1 2018, but was expected to increase in the next quarter. Of the total demand, households demand for prime lending and other lending increased, and these demands were expected to increase in the next quarter.
“Households demand for consumer loans rose in the current quarter and is expected to rise in the next quarter. Demand for mortgage/remortgaging from households rose in Q1 2018 and is expected to rise in Q2 2018.
“The availability of unsecured credit provided to households rose in the current quarter and was expected to rise in the next quarter. Lenders reported brighter economic outlook and higher appetite for risk as the major factors that contributed to the increase in Q1 2018.
“Demand for unsecured credit card lending from households increased in Q1 2018 but was expected to decrease in Q2 2018. However, demand for unsecured overdraft/personal loans from households increased in Q1 2018 and was expected to increase in Q2 2018
“Credit conditions in the corporate sector vary by size of the business. The survey asked lenders to report developments in the corporate sector by large and medium-size PNFCs, OFCs and small businesses.
“The overall availability of credit to the corporate sector increased in Q1 2018 and was expected to increase in Q2 2018. This was driven by brighter economic outlook, changing sector-specific risks, changing appetite for risk, tight wholesale funding conditions and market share objectives.
“Demand for corporate lending from all business sizes increased in the current quarter, and were also expected to increase in the next quarter. Demand for overdrafts/personal loans in Q1 2018 was higher in comparison with other loan types. The most significant factors that influenced demand for lending in the review quarter were the increase in inventory finance and capital investment, and they were expected to remain the main drivers in the next quarter”.
Note of caution
Muda Yusuf, Director-General, Lagos Chamber of Commerce (LCCI), however, sounded a note of caution, saying the focus should not be on growth in credit to the private sector but which sectors of the economy banks are lending to and the lending rate.
Speaking to Financial Vanguard, he said: “First of all we need to know what sectors these credits are moving to, that is when you can determine what kind of value they can bring into the economy.
“From what we know the situations with credits for key sectors that can actually create the kind of job that we are talking about, credit is still a major challenge. Because of cost, interest rate for these sectors, which is still mainly either Small and Medium Enterprises, SMEs, Mining, Agriculture, Real Estate is still worth over 25 percent. For SMEs it is above 30 percent or about 30 percent.
“If we have such situation we cannot celebrate the fact that there is increase in credit to private sector. And these are the sectors we are looking up to for job creation, for development, for economic diversification. That is one major challenge.
“For me credit is still a big issue. Even the intervention fund, many players complained of difficulty in having access to it. The situation of the intervention is that the credit risk for the fund is done by the banks. And what that means is that if there is a default, it is the banks that will pay.
“You know the average bank; if they know they are the one that will be liable for payment of anything they will put tight conditions. That is when they will ask you for bank guarantee. You know how difficult it is to get a bank guarantee. It is as good as having the cash yourself. It is still tough.
“The banking system is very adverse to risk. Most of these key sectors are very risky, Agriculture, SMEs and manufacturing. Most of these sectors need long term funds. How many banks are given long term funds?
Can you go to a bank now and say you are doing construction project or you want to invest in infrastructure. Are you going to use this one year credit? Even before the business stabilizes itself, it will take up to five years. You take that kind of credit, within one year they will ask you to pay back.
“We should be looking more at which sector of the economy the credits are going to and the interest rates involved because the banking sector is completely disconnected from the real economy, from many entrepreneurs. There are some sectors that even the banks don’t understand what they are doing. How do you give credit to sectors you don’t understand? Because they have this cheap means of buying treasury bills and all of that, they don’t care.”