CBN’s Tight Policy Slows Lending As Businesses Battle Cost Pressures

By FIDELUS ZWANSON

Private Sector Credit Shows Signs of Recovery Amid Economic Headwinds

NIGERIA’S private sector is gradually regaining access to credit, but economists warn that the recovery remains fragile as high interest rates, rising government borrowing and mounting production costs continue to limit lending across the economy.

Recent monetary statistics released by the Central Bank of Nigeria (CBN) indicate that Private Sector Credit Extension (PSCE) increased to ₦83.3 trillion in June 2026, representing a 3.0 per cent month-on-month increase and a 9.0 per cent year-on-year rise. While this marks the strongest annual growth recorded since December 2024, analysts note that credit expansion remains significantly below the exceptional levels witnessed during the foreign exchange revaluation period in 2024.

The latest figures suggest that banks are cautiously expanding lending to businesses and households, reflecting modest improvements in economic activity despite a challenging macroeconomic environment.

The data covers lending by deposit money banks, development finance institutions, microfinance banks, non-interest banks and direct intervention financing provided by the apex bank.

Although the improvement is encouraging, financial experts caution that businesses continue to face one of the most expensive borrowing environments in recent years.

CBN Balances Inflation Fight with Economic Growth

The modest improvement comes as the Central Bank continues to prioritize price stability over aggressive credit expansion.

For several Monetary Policy Committee meetings, the CBN has maintained a restrictive monetary policy aimed at reducing inflation and restoring macroeconomic stability.

Although inflation has eased from its peak levels recorded in 2024, policymakers remain reluctant to loosen monetary conditions too quickly, fearing that premature easing could reverse recent gains.

High benchmark interest rates have therefore remained in place, pushing commercial lending rates upward and making borrowing increasingly unattractive for manufacturers, exporters, retailers and small businesses.

Analysts argue that while tight monetary policy has contributed to moderating inflation, it has also reduced the appetite for fresh investments and expansion across many sectors.

Fuel Price Increases Add Fresh Inflation Risks

Another challenge confronting the economy is the renewed pressure from energy prices.

The recent increase in the ex-depot price of petrol by Dangote Petroleum Refinery—from previous levels to ₦1,215 per litre—is expected to trigger higher transportation and logistics costs nationwide.

Economists believe the development could fuel another wave of cost-push inflation as manufacturers pass higher operating costs to consumers.

Businesses that depend heavily on transportation, distribution and diesel-powered operations are expected to experience additional financial strain, making it even more difficult to absorb existing borrowing costs.

Global geopolitical tensions, particularly in the Middle East, also continue to create uncertainty in international oil markets.

Should global crude prices remain elevated, domestic fuel costs may continue rising despite Nigeria’s growing local refining capacity.

Businesses Struggle Under Expensive Credit

Manufacturers and Small and Medium-sized Enterprises (SMEs) remain among the sectors most affected by expensive financing.

Many companies have delayed expansion projects, reduced production plans or postponed equipment purchases because commercial lending rates remain prohibitively high.

Rather than assuming additional debt, businesses are increasingly relying on internally generated funds to sustain operations.

Financial institutions, meanwhile, continue to exercise caution in approving new loans, preferring to lend only to borrowers with stronger credit profiles.

Analysts say that despite the banking sector remaining liquid and adequately capitalised, actual demand for loans has weakened because businesses are unwilling to borrow under current market conditions.

Government Borrowing Crowds Out Private Investment

Economists are equally concerned about the rapid increase in government borrowing.

CBN data shows that credit extended to government rose by approximately 85 per cent year-on-year, reaching ₦40 trillion in June 2026.

This growth far exceeded the expansion of Nigeria’s monetary aggregates, highlighting government’s increasing dependence on domestic borrowing.

Banks generally consider government securities to be safer investments because Treasury Bills and Federal Government bonds offer relatively attractive returns backed by sovereign guarantees.

Consequently, financial institutions often allocate more resources to government securities than to private-sector lending.

This phenomenon, widely known as the crowding-out effect, reduces the volume of funds available to businesses and discourages investment in productive sectors of the economy.

Analysts warn that sustained government borrowing could ultimately reduce job creation, weaken industrial expansion and slow overall economic growth.

Policy Dilemma for Monetary Authorities

The latest figures underscore the difficult balancing act facing Nigeria’s monetary authorities.

The CBN must continue its efforts to reduce inflation while simultaneously ensuring that businesses retain adequate access to affordable financing.

Maintaining tight monetary conditions for an extended period may support macroeconomic stability, but it also risks suppressing investment, slowing business expansion and weakening overall economic activity.

Analysts believe stronger private sector lending will depend largely on sustained inflation moderation, lower interest rates, improved investor confidence and greater fiscal discipline.

Reducing government reliance on domestic borrowing, they argue, would free more capital for businesses and support broader economic recovery.

Until those conditions improve, Nigeria’s private sector is expected to continue operating in an environment characterised by expensive credit, cautious lending and limited investment opportunities.