Personal loans owed by Nigerians to commercial banks have experienced a significant decline, falling from N7.52 trillion in Q1 2024 to N3.47 trillion in Q2 2024, representing a 53.9% decrease. This drop comes as the country’s consumers face increasingly high interest rates due to the Central Bank of Nigeria’s (CBN) aggressive monetary policy aimed at curbing inflation.
The Q2 2024 report from the Central Bank of Nigeria, highlighted the sharp reduction in personal loan balances, a trend that contrasts sharply with the N5.49 trillion increase recorded in the first quarter of the year. While the report did not specify the exact reasons behind the decline, analysts suggest that many Nigerians may have opted to repay loans rather than accrue higher interest, as the Monetary Policy Rate (MPR) has been raised multiple times this year.
High Interest Rates Contribute to Loan Repayment
The contraction in personal loans is seen as a reflection of the broader economic impact of high interest rates. As part of its efforts to tame persistent inflation, the CBN, under Governor Yemi Cardoso, has increased the MPR five times this year—from 18.75% in January to 27.25% in September 2024. These hikes, totaling 850 basis points, have driven up borrowing costs, leading to reduced consumer borrowing capacity.
In addition to the fall in personal loans, total consumer credit outstanding also saw a significant drop, declining 42.6% to N4.73 trillion in Q2 2024, from N8.23 trillion in Q1. Personal loans still represent the largest portion, accounting for 73.35% of total consumer credit, though retail loans have seen a rise. Retail loans increased from N0.72 trillion to N1.26 trillion, reflecting a shift towards smaller-scale credit facilities, particularly for small businesses that are facing higher operational costs.
Shift Towards Smaller Loans Amid Economic Strain
Despite the overall decline in consumer credit, retail loans—primarily used by small businesses—rose by 75.5% in Q2 2024. This indicates that while individual borrowers are paying off their personal debts, small businesses, especially in the retail sector, are increasingly turning to credit as they struggle to navigate the rising cost of doing business in Nigeria.
CBN’s Monetary Tightening and its Economic Impact
The CBN’s rate hikes have been driven by the need to control Nigeria’s persistent inflation, which has placed significant strain on both consumers and businesses. The September 2024 inflation expectations survey by the CBN indicated that 71.4% of Nigerians surveyed favored a reduction in interest rates, citing concerns over the rising cost of borrowing and its impact on daily living expenses. Conversely, only 12.5% of respondents supported further rate hikes.
Despite widespread calls for lower rates, Governor Yemi Cardoso defended the monetary tightening, stating that the high rates were necessary to reduce excess liquidity and control inflation. However, the move has led to concerns over an increase in non-performing loans (NPLs), with global credit ratings agency Fitch projecting that NPLs in the banking sector will rise in 2024 due to high inflation and borrowing costs.
Outlook for Nigerian Banks and Consumers
As of Q1 2024, the ratio of NPLs in Nigerian banks stood at 5.1%, with Fitch expecting this figure to climb as businesses and individuals face the dual pressures of higher rates and inflation. The Central Bank’s efforts to stabilize the economy through tighter monetary policy are being closely watched, with analysts forecasting continued rate hikes in the coming months.
The next Monetary Policy Committee (MPC) meeting is scheduled for November 25-26, 2024, and it is expected that the CBN will maintain its hawkish stance, given the persistently high inflation.
As Nigerians continue to navigate the tough economic landscape, the drop in personal loans and shift toward smaller business credit reflects the ongoing strain that higher borrowing costs are placing on consumers and businesses alike. The future of Nigeria’s credit market remains uncertain, with many hoping that inflation will eventually ease, leading to a reduction in interest rates and greater economic stability.