Experts usually have believed that the minimal financial improvement in Nigeria is a chance of stretching out banking services to help many people in Nigeria. This possibility was more outlined right after the GDP was revised in April.
Although non-public credit is usually sputtering, an inadequate fiscal control can be the main risk towards the economy – higher spending anticipated as elections get near. The investment of credit towards the corporate/household sector throughout Nigeria raised to 15 trillion naira in the year 2012 from 5.05 trillion naira in 2007.
In the same time the banking sector’s regular loan-to-deposit percentage – a measure of liquidity as well as banks’ loan generation capability – was 84%. That’s, for each 100 naira within the banking sector 84 naira was expanded as loans to consumers. However, if, for instance, it was more than 100 naira, like in 2008, it revealed banks either borrowed cash for on-lending at the increased rate or perhaps an indicator that banks were being illiquid.
Though the banking sector is in a better shape the level of financial inclusion is dismal: 46.3 percent or 39.2 million adults do not have access to financial services (payments, insurance pensions, credit and bank accounts). With the formal market almost saturated, traders (business owners) and farmers are considered the next frontier.
Large companies and some households find it easier than small and medium enterprises (SMEs) to get loans because they have a track record of profits and performance. Their track record makes it easy to assess their creditworthiness and price their risk of defaulting. (One of Nigeria’s largest banks gives loans only to staff of its corporate clients.)
The need for better access to finance is vital because SMEs are drivers of growth and employment. The small size of loans to households or small businesses should benefit from the law of large numbers, if loans can be backed with collateral.
In Nigeria, the asymmetry of information and a short credit cycle are binding constraints to transactions between borrowers and lenders. These are loosened when a borrower pledges a property or some other substitute for information e.g. credit history.
For instance, prior to the banking crisis in 2009, the lack of information was an incentive for banks to expand their balance sheets to boost profits. Most of the loans were given to petrol importers. Oil prices were high, the naira stable and Nigeria’s foreign exchange reserves were large enough to support the demand for dollars to import refined crude oil, until the global economic crisis wreaked havoc.
