Nigeria’s latest monetary and credit data have laid bare a key tension at the heart of the economy: while liquidity is expanding and banks are better capitalised, credit to the private sector remains under pressure, constrained by high interest rates and a still-restrictive monetary policy stance.
Figures from the Central Bank of Nigeria (CBN) show that private sector credit extension (PSCE) rose modestly by 1.6 percent month-on-month to N75.8 trillion as at end-December 2025, a notable improvement from the subdued 0.3 percent growth recorded in November.
Yet, on an annual basis, the picture remains less encouraging. PSCE contracted by 2.8 percent year-on-year, marking the second consecutive monthly decline and underscoring the lingering strain on credit flows to the real economy.
For analysts, the mixed signals highlight an economy still adjusting to the aftershocks of aggressive monetary tightening, even as policymakers begin to signal cautious optimism about the year ahead.
A major factor behind the contraction in year-on-year private sector credit is the elevated interest rate environment.
The CBN’s restrictive monetary policy stance, which was adopted to rein in inflation, stabilise the naira, and restore macroeconomic credibility, has significantly raised the cost of borrowing.
While the policy has helped strengthen monetary transmission and anchor expectations, it has also dampened appetite for new loans among businesses and households.
Manufacturers, traders, and service providers, particularly small and medium-sized enterprises, have found credit increasingly expensive, forcing many to postpone expansion plans or rely more heavily on internal cash flows.
In this environment, even banks with ample liquidity have become more selective, prioritising risk management over aggressive loan growth.
The PSCE data captures lending across the entire banking system, including deposit money banks (DMBs), state-owned development finance institutions such as the Bank of Industry, and smaller players like microfinance and non-interest banks. DMBs account for about 69 percent of total private sector credit, making their lending behaviour a critical driver of overall trends.
A narrower measure of credit, which is total lending by DMBs, presents a more nuanced story.
According to the CBN’s Q2 2025 Statistical Bulletin, total credit by DMBs rose by 4 percent year-on-year to N58.2 trillion as at end-June 2025. This suggests that commercial, merchant, and non-interest banks have continued to expand lending, albeit at a moderate pace.
The gap between total PSCE (N75.8 trillion) and DMB credit (N58.2 trillion), amounting to roughly N17.9 trillion, reflects several factors. Part of the difference can be attributed to reporting lags across institutions.
However, a significant portion represents credit extended by the central bank itself through liquidity support facilities and development finance programmes designed to cushion priority sectors of the economy.
Additional contributions come from other financial institutions, including microfinance banks and mortgage lenders, which play a growing, though still relatively small, role in credit delivery, particularly to households and informal businesses.
Perhaps the most striking contrast in the data is between sluggish private sector credit growth and the rapid expansion of money supply.
Broad money (M3) and M2 both increased by 9.8 percent year-on-year to N124.4 trillion, signalling strong liquidity growth in the system. The relatively small gap between M3 and M2 reflects other liquid liabilities, mainly Open Market Operation (OMO) bills.
Ordinarily, such an expansion in money supply would be expected to translate into stronger credit growth.
However, the disconnect points to the powerful dampening effect of high interest rates and risk aversion. In simple terms, money is available, but the incentives to borrow and lend aggressively remain weak.
Analysts note that much of the liquidity growth has been absorbed by government financing needs rather than flowing into private sector activity.
Credit to the government surged by 26 percent year-on-year to N34.2 trillion, with December alone recording a sharp 29.9 percent month-on-month increase. This acceleration reflects increased domestic borrowing to finance fiscal operations amid ongoing efforts to manage budget deficits and reduce reliance on external debt.
While stronger government credit growth can support public spending and infrastructure investment, it also raises concerns about crowding out. With attractive yields on government securities, banks may prefer the relative safety of sovereign exposure over riskier private sector lending, especially in a high-rate environment.
The data also shows that net foreign assets declined by 1 percent year-on-year, largely reflecting the stronger expansion in net domestic assets (up 14 per cent year-on-year) and broad money supply.
This dynamic underscores the growing importance of domestic liquidity and credit creation in driving monetary aggregates.
