Credit to small and medium enterprises (SMEs) is alarmingly low, accounting for only about one per cent of total credit.
It is also estimated that the sector has a financing gap of about N48 trillion according to PWC.
The Centre for the Promotion of Private Enterprise (CPPE) stated this in a policy brief on the ongoing bank recapitalisation programme.
The document titled: Bank Recapitalisation: Strong Progress, But Urgent need to Reconnect Banks to the Real Economy, said that 17 per cent private sector credit as a percentage of GDP in Nigeria is too low to drive the economy and called on the Central Bank of Nigeria (CBN) to take advantage of the new stronger capital base to reconnect the banks to the real economy.
While it expressed delight that the recapitalisation exercise has been very successful, CPPE in the document signed by its Chief Executive Officer, Dr Muda Yusuf, said the low credit to SMEs is particularly troubling given that SMEs contribute approximately 50 per cent of GDP and over 80 per cent of employment.
It said the average percentage of private sector credit to GDP in sub-Saharan Africa is about 25 per cent and approximately 34 per cent for lower-middle-income countries.
It said the recapitalisation programme has significantly strengthened the capacity of banks to absorb shocks, support large-ticket transactions and enhance financial system stability.
“However the critical question now is whether this stronger banking system will sufficiently support the real economy”, it said, adding that the evidence suggests that this linkage remains weak. “This gap underscores a persistent structural disconnect between the financial system and productive sectors of the economy”, it noted.
CPPE said peer economies such as South Africa boasts 57.5 per cent private sector credit to the GDP, Mauritius, 69.8 per cent and Cape Verde 66.3 per cent demonstrating significantly stronger financial intermediation.
It said the situation is even more concerning when disaggregated across key segments of the economy.
According to the document, “Consumer credit in Nigeria remains extremely low at about 7 per cent of total credit, compared to a sub-Saharan African average of 15–25 per cent.
“This weak consumer credit environment constrains domestic demand and limits growth prospects across multiple sectors.
“This represents one of the most significant weaknesses in Nigeria’s financial architecture”, it said.
The Centre said there are also important structural concerns regarding the nature and distribution of credit in the economy.
“A large proportion of bank lending remains short-term in nature. Credit with maturity of less than one year accounts for about 55 per cent of total credit, while long-term credit (above three years) accounts for only about 25 per cent. “This structure is not aligned with the financing needs of critical sectors such as manufacturing, agriculture, infrastructure and real estate”, it said, noting that the sectoral allocation of credit remains skewed. “The services sector accounts for about 55 per cent of total credit, while manufacturing receives about 14 per cent and agriculture just five per cent. This pattern is inconsistent with Nigeria’s aspirations for economic diversification, industrialisation and job creation.”
It listed some of the factors constraining the effective transmission of financial sector strength to the real economy to include: the crowding-out effect of high government borrowing, a tight monetary policy environment and elevated interest rates, high risk perception and stringent collateral requirements for SMEs, as well as incentive structures that favour short-term, low-risk financial investments over real sector lending.
With recapitalisation largely achieved, the CPPE urged the CBN and the fiscal authorities to prioritise the next critical phase of reform, which is reconnecting the banking system to the real economy.
“This should include deliberate policy measures to increase private sector credit as a percentage of GDP to at least 30 per cent in the medium term, de-risk lending to SMEs through credit guarantees and improved credit infrastructure, strengthen monetary policy transmission to ensure lower policy rates translate to real sector lending, incentivise long-term financing for productive sectors, promote a more balanced sectoral allocation of credit, and expand access to consumer credit to stimulate aggregate demand, as well as address the crowding-out effects of public sector borrowing”, it noted.
It said the ultimate success of this reform will be determined not just by stronger balance sheets, but by the extent to which the banking system supports investment, enterprise, job creation and economic transformation.
“At this critical juncture, the priority must shift from capital adequacy to economic impact”, it said.
“Nigeria needs not just stronger banks, but banks that work for the economy.