Bank’s credits to Nigeria’s economy rose from N81. 7 trillion to N117.9 trillion by the third quarter of this year.

The latest data from the Central Bank of Nigeria (CBN) shows double-digit growths in credits to the government and the private sector.

Banks’ credits include sovereign issuances, loans, trade credits, and other account receivables and supports provided by banks to the government and the private sector within a period.

A breakdown indicated that credits to the private sector (CPS) accounted for nearly two-thirds of the total credits to the economy, rising by 27.5 percent from N59.51 trillion by September 2023 to N75.85 trillion by September 2024.

CPS accounted for nearly three-quarters of total credits by the third quarter of last year.

However, government’s reliance on the domestic banks to bridge the budget deficit saw an increase in loans to the government by 89.8 percent from N22.14 trillion in the third quarter of last year to N42.02 trillion in the third quarter of this year.

The proportion of government financing to total financing thus increased from 27.12 percent in 2023 to 35.65 percent in 2024. The proportion of credits to private businesses dropped from 72.88 percent to 64.35 percent.

Month-on-month analysis showed a modest recovery in CPS. It rose by 1.5 percent from N74.73 trillion last August to N75.85 trillion in September.

The CPS is a global measure of the banking sector’s balance sheet resilience and contribution to the national economic agenda.

With banks posting resilient earnings and the immediate success of the ongoing banking recapitalisation, analysts believe they (banks) are in a stronger position to continue to support the national economic agenda.

A major highlight of the ongoing government’s economic renewal agenda is the push for a $1 trillion economy, a major reason for the ongoing banking recapitalisation programme.

Analysts at Cordros Capital said: “We project the CPS will maintain a double-digit expansion in 2024 full year as we believe the re-enforcement of the CBN’s limit on the loans-to-deposits macro-prudential ratio for deposit money banks (DMBs) will continue to drive the willingness of commercial banks to create risky assets.

‘’Nonetheless, we acknowledge that the increased monetary policy tightening measures may tether CPS growth.”

In the first cluster under the recapitalisation plan, six banks were believed to have raised more than N1.5 trillion in a momentous opening to the recapitalization process.

The banks that have raised funds so far include Guaranty Trust Holding Company (GTCO) Plc, Access Holdings Plc, Zenith Bank International Plc, Fidelity Bank Plc, FCMB Group Plc, and Sterling Holding Company.

Also, not less than five banks are rounding off preliminary documentation and approval processes to raise more than N1 trillion in the second cluster of the capital raising.

Multiple sources confirmed that the banks had reached advanced stages in their pre-offer processes, with the two largest banks within the cluster expected to headline the capital raising this quarter.

The banks include United Bank for Africa (UBA) Plc, Stanbic IBTC Holdings Plc, Wema Bank Plc, Premium Trust Bank, and Jaiz Bank Plc among others.

Investment banking sources said UBA and Stanbic IBTC Holdings would lead the next cluster with the two first-tier banks expected to launch their offers within this quarter.

Nigeria’s apex capital market regulator, the Securities and Exchange Commission (SEC), was said to be processing applications from the banks already. There were some six offers currently undergoing the regulatory approval process, the main regulatory hurdle preparatory to the launching of the offers.

A report by the CBN showed that Nigerian banks had seen a significant increase in deposits during the first half of this year. The report indicated that banks’ demand deposits rose from N26.7 trillion recorded at the end of December 2023 to N33.0 trillion by June 2024.

Banks had sustained steady growth in deposits across the quarters. Total demand deposits in the first quarter ended March 2024 had risen by 8.1 percent to N28.9 trillion. In the second quarter ended June 2024, banks’ deposits increased by 14.3 percent to N33 trillion.

Nearly all banks have seen significant increases in deposits in recent periods, providing the headroom for most banks to create new loans and advances.

Experts agree that increase private sector credit implies a major boost for the economy as there is a link between credit to the private sector and economic growth. Several studies have continuously found that increased lending by banks directly leads to increase in Gross Domestic Products (GDP).

A study published by the CBN concluded that “credit is growth-enhancing, even when trade openness, monetary policy, investment climate, and infrastructure are low.” The study found that private-sector credit increases economic growth.

The balance sheet strength of banks also determines the flow of credits, with the continuing increase in lending amidst macroeconomic headwinds underpinning Nigerian banks’ resilience and stability.

In a study on ‘Balance Sheet Strength and Bank Lending During the Global Financial Crisis’, researchers at the International Monetary Fund (IMF) examined the role of bank balance sheet strength in the transmission of financial sector shocks to the real economy.

The study found that “banks with strong balance sheets were better able to maintain lending during the crisis”.

According to the study, banks that were ex-ante more dependent on market funding and had lower structural liquidity reduced the supply of credit more than other banks.

“However, higher and better-quality capital mitigated this effect. Our results suggest that strong bank balance sheets are key for the recovery of credit following crises, and provide support for regulatory proposals under the Basel III framework,” the IMF report stated.

Managing Director, Arthur Steven Asset Management, Mr Olatunde Amolegbe, said the growth in credit to the private sector could be attributable to increase in economic activity.

He however pointed out that other factors such as inflation and devaluation could moderate such increase.

CBN Governor Olayemi Cardoso said the ongoing recapitalisation would strengthen banks further to drive the $1 trillion national economic target and support stable growth in the economy.

According to him, additional capital would not only provide a substantial buffer for banks against potential economic challenges but also enhance Nigeria’s banks’ capability to support massive economic growth and play competitively globally.

Experts agreed that considering the increasingly changing dynamics in the banking sector and the overall economy since the last recapitalisation, it has become necessary to strengthen the banks’ financial positions.

The CBN had in March 2024 released its circular on the review of minimum capital requirements for commercial, merchant, and non-interest banks. The apex bank increased the new minimum capital for commercial banks with international affiliations, otherwise known as mega banks, to N500 billion; commercial banks with national authorisation, N200 billion and commercial banks with regional license, N50 billion.

Others include merchant banks, N50 billion; non-interest banks with national license, N20 billion, and non-interest banks with regional license will now have N10 billion minimum capital. The 24-month timeline for compliance ends on March 31, 2026.

Under the new minimum capital base, CBN uses a distinctive definition of the new minimum capital base for each category of banks as the addition of share capital and share premium, as against the previous use of shareholders’ funds. While several banks have shareholders’ funds over the new minimum capital base, their share premium and share capital significantly fall short of the new minimum definition.

Credit: The Nation