By Chinwendu Obienyi
Despite the contraction in private sector lending, banks across Nigeria are expected to maintain their compliance with the Central Bank of Nigeria’s (CBN) 50 per cent Loan-to-Deposit Ratio (LDR) requirement.
According to analysts at FBNQuest Merchant Bank Research, this trend is driven by tighter monetary policies, liquidity constraints, and increased credit risk concerns in the financial sector.
The most recent data on the Central Bank of Nigeria’s (CBN) money and credit statistics shows that private sector credit extension (PSCE) decelerated by -2 per cent year-on-year (y/y) to N74.9 trillion as at end of Jan 2025.
This y/y slowdown in PSCE growth is significant as it marks the first time that credit lending to the private sector has contracted in recent times, reflecting the impact of the CBN’s monetary tightening measures in reducing liquidity in the financial system. This measure of PSCE covers lending by the entire banking system and not merely the deposit money banks (DMBs).
It also covers lending by the CBN and state-owned development banks, such as the Bank of Industry, and smaller credit extensions by other banks, such as microfinance and non-interest banks.
Analysing the CBN’s Quarterly Statistical Bulletin (QSB) for Q3 2024, PSCE stood at N58.6 trillion as at end-Sep 2024, implying an increase of 50 per cent y/y. It is important to note that this series covers only lending by deposit money banks (DMBs).
Consequently, the difference between total PSCE and lending by deposit money banks (DMBs) leaves a gap of around N16.3 trillion as at Sep 2024, little of which is attributable to the time lag of 3 months.
However, a significant proportion of the difference can be attributed to lending by state-owned banks, such as the Bank of Industry, and credit extensions by smaller banks.
“Despite the y/y moderation in private sector credit, all other monetary aggregates that we track continue to trend upwards, but at a slower pace. More specifically, credit extension to the government increased by 4 per cent y/y to about N24.5 trillion. This marks a significant moderation from the peak growth of 319 per cent y/y recorded in October”, FBNQuest Merchant Bank said in its report.
Broad money supply (M3), and (M2) money supply, which are considered by the monetary authorities as drivers of inflationary pressures, both stood at N111.0 trillion, implying y/y growth rates of 17 per cent y/y and 18 per cent y/y, respectively.
“Despite the continuous expansion of broad money supply components, our chart, as shown below, indicates a gradual moderation on the back of CBN’s policy interventions.
Looking ahead, we expect credit growth to remain subdued in the near term due to the CBN’s tight monetary policy stance. However, we believe the banks’ adherence to the regulatory 50 per cent loan-to-deposit ratio will continue to spur lending activity to the real sector”, they said.
The CBN has consistently emphasized the need for banks to sustain lending to the private sector. Failure to comply with the LDR threshold could attract regulatory penalties, compelling banks to maintain compliance.
However, banks may still allocate loans selectively to meet the 50 per cent LDR target.