Rising economic challenges drive Nigerians deeper into debt, with N290bn borrowed in three months — CBN

In the face of a challenging economic situation, Nigeria has witnessed a surge in its citizens’ indebtedness, with individuals borrowing approximately N290bn from banks in just three months. This revelation comes from the recently released Economic Report for the Second Quarter of 2023 by the Central Bank of Nigeria (CBN).

According to the report, consumer credit, encompassing personal and retail loans, experienced a significant 12.2percent increase from N2.35 trillion in the first quarter of 2023 to N2.64 trillion by the second quarter of the same year.

This translates to a staggering N290bn surge in borrowing between April and June.Out of the total consumer credit of N2.64 trillion recorded in June 2023, personal loans accounted for N1.92 trillion (72.9 percent), while retail loans constituted N715.10 billion (27.1 percent).

The report’s findings shed light on the growing financial strain faced by Nigerians, as they turn to borrowing to navigate the country’s challenging economic landscape.

The reasons behind this surge in debt are likely multifaceted, with factors such as rising inflation, unemployment, and reduced purchasing power playing a significant role.

The increasing reliance on personal loans, which make up the majority of consumer credit, suggests that individuals are seeking financial assistance to meet immediate needs, such as medical expenses, education costs, or home repairs.

On the other hand, retail loans indicate a rise in borrowing for consumer goods, possibly due to the need for essential items or the desire to maintain a certain standard of living amidst economic hardships.

The CBN’s report serves as a wake-up call for policymakers and financial institutions to address the underlying issues contributing to this mounting debt burden.

According to the report, “Consumer credit improved owing to increased demand for personal loans and strengthened enforcement of the Loan-to-Deposit Ratio (LDR) policy. Consequently, total consumer credit increased significantly by 12.2 percent, to N2,637.31 billion in the second quarter of 2023, compared with N2,349.88 billion at the end of the preceding quarter.

“As a share of total credit by ODCs, consumer credit declined to 7.0 percent, this was below the 7.7 and 7.8 percent recorded in the preceding quarter and the corresponding period of 2022, respectively. The components of consumer credit revealed that personal loans accounted for the larger share, totalling N1,922.20 billion, representing 72.9 percent of the total, while retail loans accounted for 27.1 percent, equivalent to N715.10 billion.”

The apex bank attributed the increase in consumer credit to more demand for personal loans and reinforced the implementation of the LDR policy.

Nigeria’s inflation has been on the rise, with indications that it may hit 30 percent by December 2023./

The surging inflation has left many Nigerians groaning under the weight of the skyrocketing cost of everything from food to fuel and rent.

Inflation pushed an estimated four million more Nigerians into poverty in the first five months of this year, the World Bank said in July.

Already, about 133 million Nigerians are multidimensionally poor. If the inflation persists, there is a high risk that more Nigerians will fall into poverty.

It is not surprising that more Nigerians have to borrow to meet up with daily needs, among others.

In fact, a report by SBM Intelligence found that 27 percent of Nigerians across different income categories resort to loan apps to sustain their living expenses amid rising inflation.

Against this background, the CBN in July this year noted that it would resume the enforcement of the LDR policy effective July 31, 2023.

The move, according to the central bank, was made in response to a directive issued to banks on January 7, 2020, which mandated that they keep their LDR at a minimum of 65 percent.

A bank’s liquidity can be evaluated using the loan-to-deposit ratio (LDR), which is calculated by dividing the total loans by the total deposits. A bank’s ability to meet its liquidity requirements (pay depositors) in the event of a market downturn can be gauged from this metric.

To further clarify that the restart of enforcement was in keeping with the policy’s purpose and the need to reduce industry surplus liquidity, the central bank sent a letter to the banks, signed by Abu Shebe on behalf of the CBN Director, Banking Supervision.

Banks were required by the apex bank to maintain a minimum loan-to-funding ratio (LDR) of 60.0 percent on July 3, 2019; this requirement was raised to 65.0 percent on September 30, 2019, with the intention of encouraging banks to increase consumer, mortgage, and corporate credits, which in turn would stimulate aggregate demand, output growth, and employment.

The purpose of the LDR policy was also to encourage banks to boost credit distribution to the real sector of the economy.