The World Bank has said that the discontinuation of the Central Bank of Nigeria’s Ways and Means (W&M) advances, combined with ongoing monetary policy tightening, has exposed the actual, higher cost of Government borrowing in Nigeria.
This was disclosed in the World Bank’s latest Nigeria Development Update report entitled “Building Momentum for Inclusive Growth”, released on Monday.
According to the report, with W&M advances no longer serving as a backdoor source of cheap financing, Government borrowing began reflecting market realities in 2024.
Consequently, lending to the central Government became more profitable for banks and other deposit-taking institutions, with credit to the Government rising by 19.8% year-on-year by December 2024.
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The report noted that the W&M balance dropped significantly, falling by 68% in real terms over the year. In contrast, credit to the private sector, which initially grew in early 2024, slowed down as market interest rates rose, ending the year at levels similar to 2023.
Central Bank credit to the private sector also remained subdued, reflecting the winding down of the direct credit interventions that had distorted the market between 2020 and 2022. At their peak in mid-2022, such interventions accounted for nearly 10 percent of total private sector credit.
Despite some recent improvements, the report described Nigeria’s financial sector as still shallow. Digital financial services have contributed to greater financial inclusion, with e-payment transaction volumes and values rising by 14.9% and 17.6% respectively in the first half of 2024 compared to the same period in 2023. Nonetheless, total credit to the public and private sectors stood at just 26.6% of GDP in 2024, among the lowest ratios globally.
Similarly, market capitalisation on the Nigerian Exchange Group (NGX) remains modest relative to peer economies.
The World Bank also pointed to structural limitations in the monetary policy framework. Unlike in many countries where the Cash Reserve Ratio (CRR) is used as a prudential tool, Nigeria relies heavily on the CRR to manage liquidity. This has resulted in exceptionally high CRR levels, constraining banks’ ability to lend. As of 2024, 27% of total bank deposits were held in required reserves with the CBN, and an additional 12% were locked in CBN securities. Together, 41% of deposits were effectively sterilised, reducing the pool of funds available for lending to both public and private sectors.
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Moreover, since required reserves are not remunerated, banks must maintain higher lending spreads to compensate for lost earnings, further raising the cost of credit in the economy.
Despite these challenges, the report found that Nigeria’s banking sector remains fundamentally sound. Non-performing loans (NPLs) as a share of total loans rose slightly by 0.4 percentage points to 4.6% in Q3 2024 but remained below the CBN’s prudential ceiling of 5 percent. The industry’s liquidity ratio stood at 46 percent in September 2024, well above the 30 percent regulatory minimum.
The World Bank also highlighted positive industry response to the CBN’s recapitalisation programme. By September 2024, the capital adequacy ratio (CAR) had risen by about 2 percentage points to 14% year-on-year, driven by stronger earnings, retained profits, and a decline in risk-weighted assets.
While specific CAR data by bank type was not disclosed, the report noted that average industry CAR remained above the 10% benchmark required for national and regional banks, although still below the 15% standard for banks with international licenses.
