Nigeria’s private sector credit market is beginning to show signs of strain under the weight of the Central Bank of Nigeria’s (CBN) prolonged tight monetary stance, even as broader liquidity indicators and external buffers continue to strengthen. New data from the apex bank point to a financial system caught between the gains of macroeconomic stabilisation and the pressing need to unlock growth-supporting credit, a tension that could define policy choices in 2026.
According to the CBN, private sector credit extension (PSCE) edged up by just 0.3 percent month on month to N74.6 trillion in November 2025. While the marginal increase suggests some resilience, the year-on-year picture is less encouraging, with PSCE declining by 2 percent. The contraction highlights the dampening effect of elevated interest rates and restrictive liquidity conditions on borrowing, investment and business expansion.
The slowdown reflects the impact of the CBN’s hawkish policy posture, which has prioritised inflation control, exchange rate stability and the restoration of macroeconomic confidence. Higher policy rates and tighter liquidity have raised borrowing costs, forcing banks to become more selective in lending and prompting many businesses to defer capital expenditure and scale back growth plans.
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Private sector credit data cover lending across Nigeria’s entire financial ecosystem, including deposit money banks (DMBs), development finance institutions such as the Bank of Industry, microfinance banks and non-interest lenders. DMBs remain dominant, accounting for about 69 percent of total private sector credit. However, a closer look reveals subtle shifts in credit composition.
Data from the CBN’s Quarterly Statistical Bulletin for the second quarter of 2025 show that total lending by deposit money banks stood at N58.2 trillion as of end-June, representing a modest 4 percent year-on-year growth. The gap between this figure and the broader PSCE total about N16.5 trillion, suggests that non-DMB institutions are playing a growing role in credit supply as commercial banks adopt a more cautious stance.
Analysts say this evolving mix indicates that while system-wide liquidity is ample, risk appetite among large banks has been constrained by tight policy conditions, asset quality concerns and the need to preserve capital in a volatile operating environment.
Paradoxically, the credit slowdown is unfolding alongside strong growth in key monetary aggregates. Broad money supply (M3) and narrow money (M2) both expanded by 13 percent year on year to about N123.0 trillion and N122.9 trillion, respectively, signalling abundant liquidity in the system. Net foreign assets rose even more sharply, surging by 115 percent to N37.4 trillion, reflecting improved external liquidity driven by foreign portfolio inflows and resilient diaspora remittances following FX market reforms.
Nigeria’s external reserves also strengthened, rising by $4.6 billion year on year to $45.5 billion at the end of 2025. The reserve build-up has bolstered the CBN’s capacity to manage external shocks, support the naira and sustain foreign investor confidence. Yet the muted transmission of these gains into private sector credit underscores a key reality: liquidity alone does not guarantee lending. Price stability, policy clarity and risk perception remain decisive.
Credit to government presents a contrasting trend. On a year-on-year basis, public sector credit fell sharply by 33 percent, reflecting efforts to curb deficit monetisation and reduce the crowding out of private borrowers. However, on a month-on-month basis, government credit rose by 6 percent to N26.4 trillion, pointing to episodic financing needs amid ongoing fiscal pressures.
The decline in annual government borrowing from the banking system is widely seen as a positive structural shift, potentially freeing up space for private sector lending. In practice, however, the benefits have been slow to materialise due to persistent monetary tightness and cautious bank behaviour.
For businesses, the impact is increasingly evident. High lending rates have squeezed margins, delayed capital investments and constrained working capital, particularly for small and medium-sized enterprises. Many firms are turning to internal cash flows, development finance institutions or informal credit channels to stay afloat.
Economists argue that while the short-term pain is significant, the longer-term payoff could be substantial if macroeconomic stability is sustained. Lower inflation, a more stable exchange rate and stronger external buffers would eventually reduce risk premiums and set the stage for a healthier credit cycle.
Looking ahead, expectations are mounting that 2026 could mark a turning point. A softer inflation outlook and improving business conditions may give the CBN room to recalibrate its stance, easing policy rates and liquidity constraints. Combined with the ongoing bank recapitalisation exercise, which is expected to strengthen balance sheets and risk-bearing capacity, a gradual policy shift could unlock pent-up demand for credit.
Analysts believe that if monetary easing is carefully sequenced and anchored on sustained disinflation, private sector credit growth could rebound meaningfully in 2026, supporting output expansion, job creation and broader economic recovery.
Ultimately, the data highlight the delicate balance facing Nigeria’s monetary authorities: consolidating macroeconomic stability without choking off the credit needed to drive growth. While stabilisation has come at a cost, it may also be laying the groundwork for a more durable and sustainable credit expansion in Africa’s largest economy.
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