Nigeria’s latest monetary and credit figures from the Central Bank of Nigeria (CBN) reveal a sharp contrast in the economy: while liquidity is expanding and banks are better capitalised, credit to the private sector remains under strain due to high interest rates and restrictive monetary policy.
Private sector credit extension (PSCE) rose modestly by 1.6% month-on-month to ₦75.8 trillion at the end of December 2025, an improvement from the subdued 0.3% growth in November.
Yet, on an annual basis, PSCE contracted by 2.8% year-on-year, marking the second consecutive monthly decline.
Analysts say the mixed signals highlight an economy still adjusting to the aftershocks of aggressive monetary tightening.
The CBN’s restrictive stance, aimed at curbing inflation, stabilizing the naira, and restoring macroeconomic credibility, has significantly raised borrowing costs.
While the policy has strengthened monetary transmission, it has dampened demand for new loans.
Manufacturers, traders, and service providers—particularly small and medium-sized enterprises (SMEs)—have found credit increasingly expensive, forcing many to delay expansion or rely on internal cash flows.
Even banks with ample liquidity have become more cautious, prioritizing risk management over aggressive loan growth.
Banking Sector Credit Trends
The PSCE data covers lending across deposit money banks (DMBs), development finance institutions, microfinance, and non-interest banks. DMBs account for about 69% of total private sector credit, making their lending behavior critical.
According to the CBN’s Q2 2025 Statistical Bulletin, total credit by DMBs rose 4% year-on-year to ₦58.2 trillion as of June 2025.
This suggests commercial, merchant, and non-interest banks have continued to expand lending, though moderately.
The gap between total PSCE (₦75.8 trillion) and DMB credit (₦58.2 trillion)—about ₦17.9 trillion—reflects reporting lags and credit extended by the CBN itself through liquidity support facilities and development finance programmes.
Other contributions come from microfinance banks and mortgage lenders, which play a growing but still small role in household and informal sector credit.
Liquidity Expansion vs. Weak Credit Growth
Perhaps the most striking contrast is between sluggish private sector credit growth and rapid expansion of money supply. Broad money (M3) and M2 both increased 9.8% year-on-year to ₦124.4 trillion, signaling strong liquidity growth.
Ordinarily, such expansion would translate into stronger credit growth. However, high interest rates and risk aversion have dampened incentives to borrow and lend.
Some analysts think that much of the liquidity growth has been absorbed by government financing needs rather than private sector activity.
Credit to the government surged 26% year-on-year to ₦34.2 trillion, with December alone recording a sharp 29.9% month-on-month increase.
This reflects increased domestic borrowing to finance fiscal operations and reduce reliance on external debt.
While stronger government credit growth supports public spending and infrastructure, it raises concerns about crowding out.
With attractive yields on government securities, banks may prefer sovereign exposure over riskier private sector lending.
The data also shows net foreign assets declined by 1% year-on-year, while net domestic assets expanded 14% year-on-year, underscoring the growing importance of domestic liquidity and credit creation in driving monetary aggregates.
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