CBN Data Shows Sharp Drop in Consumer Credit as Interest Rates Bite
Consumer credit in Nigeria took a significant hit in Q2 2024, dropping by 42.6% to ₦4.73 trillion compared to the first quarter of the year. This decline follows a period of aggressive monetary tightening by the Central Bank of Nigeria (CBN), which has implemented five consecutive interest rate hikes under Governor Yemi Cardoso. While the CBN did not provide specific reasons for the decline, the data suggests that Nigerians are increasingly paying down their debts amidst the country’s high interest rates.
The sharp reduction in consumer credit—especially personal loans, which fell from ₦7.52 trillion to ₦3.47 trillion—highlights the growing strain on borrowers as the CBN’s hawkish monetary policy continues to take effect. Personal loans still account for a substantial 73.35% of total consumer credit, but the overall slowdown in credit activity indicates financial stress among households.
Retail Sector Shows Increased Borrowing Amid Economic Strain
Despite the overall decline in consumer credit, retail loans have seen a marked increase, rising from ₦0.72 trillion in Q1 2024 to ₦1.26 trillion in Q2 2024. This suggests a shift toward smaller-scale borrowing, with small businesses in the retail sector particularly feeling the pressure. As Nigeria’s economy grapples with high inflation and rising costs of doing business, more small enterprises are resorting to credit to maintain operations.
This growing reliance on credit by small businesses reflects broader economic challenges, with entrepreneurs struggling to survive amid escalating costs. For many, higher borrowing costs are a bitter reality as they navigate a fragile economy marked by both inflation and currency depreciation.
Interest Rate Hikes and Inflationary Pressures
The CBN’s aggressive rate hikes—increased by a total of 850 basis points since Cardoso’s appointment—are designed to combat Nigeria’s persistent inflationary pressures, particularly in food and core inflation. The Monetary Policy Rate (MPR) has risen from 18.75% to 27.25% over the past year, with the most recent hike in September 2024 pushing rates to their highest levels in over a decade.
This tightening stance has led to higher borrowing costs for both individuals and businesses. While the CBN argues that these measures are necessary to curb inflation and stabilize the economy, they have placed considerable strain on Nigerians, with widespread concerns about the cost of borrowing.
Fitch Ratings Projects Higher Non-Performing Loans
The economic outlook for Nigeria’s banking sector is becoming more challenging. Fitch Ratings recently projected an increase in non-performing loans (NPLs) in 2024, driven by high interest rates and persistent inflation. While the NPL ratio was 5.1% as of the end of Q1 2024, Fitch expects it to rise as more borrowers struggle to meet their obligations.
Despite this, the size of Nigerian banks’ loan books remains relatively small—just 35% of banking sector assets as of 2023—limiting the overall risk to financial stability. Still, the outlook for the banking sector remains clouded by macroeconomic uncertainties.
Public Sentiment: Majority Call for Interest Rate Cuts
A recent Inflation Expectations Survey conducted by the CBN in September 2024 revealed that a significant 71.4% of Nigerians believe interest rates should be reduced. The survey, which included over 3,400 respondents from across the country, highlighted growing concerns over the impact of high borrowing costs on businesses and households. Only 12.5% of respondents supported further rate hikes, while 16.1% preferred keeping rates unchanged.
This overwhelming preference for lower rates underscores the economic hardships many Nigerians face, as higher borrowing costs contribute to the growing financial strain on both consumers and businesses.
Looking Ahead: Further Rate Hikes Likely
Despite public opposition to higher interest rates, Governor Yemi Cardoso has emphasized that the 27.25% rate is essential to curbing inflation and managing excess liquidity in the economy. The **next *Monetary Policy Committee (MPC)* meeting is scheduled for November 25-26, 2024, and analysts expect the CBN to continue its tightening policy as inflationary pressures remain elevated.
While the CBN’s monetary policy aims to restore economic stability, the high interest rates are undoubtedly weighing heavily on both consumer confidence and business sustainability. As inflation continues to outpace income growth, Nigerians may face a prolonged period of financial difficulty, with rising borrowing costs and reduced credit availability.
