A recent report released by Afrinvest estimates Nigeria’s ‘aggregate banking sector loans and advances stood at approximately 20.1% of Nominal Gross Domestic Product (GDP) in 2010. Significantly lower than that of South Africa which stood at over 100% of GDP’.
So what does this all mean? GDP is basically a sum of the value of all the goods and services produced in Nigeria or in any given country. What is the relationship with loans then? Well, we are simply saying that loans make a small percentage (20%) of all the sum of goods and services produced in Nigeria. A better illustration will be to imagine Nigeria as a company. So, if as a company the total value of goods we produce is N100 and the level of debt we have is N20 (20%) it then means the company borrowed N20 in producing goods worth N100. Seems good on the face of it right? Wrong! Let’s examine further.
A rise in bank lending versus the GDP shows that the economy’s financial sector is growing rapidly and is thus playing a crucial role in the growth of the economy. With ours at a level of about 20% probably means the following;
1. Our banks don’t have the capacity (enough money) to lend to the economy. Probably why we banks in Nigeria rarely give long term loans
2. A non existent mortgage market. That is the percentage of the bank loans to mortgage in Nigeria is very low. According to The Federal Mortgage Bank of Nigeria, “Nigeria needs about N56trillion ($353b) to remedy our housing deficit of 16million units”. That is about the size of our GDP $355b. So if we are to achieve housing for all our borrowing on mortgages alone will be about 100% of GDP.
3. It could also mean that our banks are dangerously over leveraged (lent too much). But that’s not the case as recent stats also show that bank lending in “Nigeria increased 11.4% in 2010 as against 43.1% 5 year average in the pre banking crisis era” according to Businessday.
4. The banks have weak and inadequate financial infrastructure. That is, they lack the structure required to process loans, assess new borrowers, analyse credits and have a good understanding of how businesses operate and what their financial needs are. In Nigeria banks don’t give more than 5year loans on an average even if you want to build a shopping mall that will take at least 3 years to be completed and another 5 to break-even.
5. If the private sector is small then bank lending to the economy will also be small. The total market capitalisation (value of all the companies in our stock market) was about N10.1trillion ($66b) as at Sep 30 2011. South Africa’s market cap was about $900b as at July 2011. A clear indication of how small the value of the companies trading on the Nigerian Stock Exchange.
6. Mono Export Economy could also be a cause. While Nigerian businesses depend heavily on Government expenditure to drive the private economy, the Government in turn depend on oil. Basically, oil drives economic growth in Nigeria as other sectors such as manufacturing, construction, real estate, tourism etc lack adequate capital to finance their heavy capital intensive investment.
In a nutshell, these and many more factors could be the reason. The fact is that for just as it is for business, for any country to really grow its economy (especially private sector driven growth) its level of debt must be about 75% to 80% of its GDP. Our banks need to be bigger, stronger and well funded which I why I supported the banking consolidation and the new CBN cash policy. A country with the kind of population, human and natural resources we have should be doing a whole lot more.
See World Bank table of countries Domestic Private Credit to GDP
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