Credit Access Shrinks as Banks Adapt to Elevated Rate Regime

Despite the strengthening of external buffers and broader liquidity indicators, the Central Bank of Nigeria’s (CBN) extended tight monetary policy is causing early symptoms of strain on Nigeria’s private sector lending landscape.

A system trapped between macroeconomic stabilization and the pressing need to unlock growth-supporting credit is revealed by new CBN statistics, paving the way for a potentially significant change in 2026.

The CBN reports that private sector credit extended (PSCE) increased to N74.6 trillion in November 2025, a little increase of 0.3 percent each month.

The PSCE fell by 2% year over year, highlighting the dampening effect of high interest rates and tight liquidity circumstances on borrowing and investment, even though the slight increase points to some resilience.

The CBN’s aggressive policy approach, which was implemented to control inflation, stabilize the naira, and rebuild trust in the macroeconomic system, is primarily responsible for this moderation.

The cost of capital has increased due to higher policy rates and stricter liquidity requirements, which has forced banks to be more selective when creating credit and caused companies to postpone expansion plans.

Under Pressure, a Wide Credit System

Crucially, the PSCE data includes lending from all parts of Nigeria’s banking and credit ecosystem, not simply deposit money banks (DMBs). Microfinance banks, non-interest banks, and state-owned development financing institutions like the Bank of India are all included. Nevertheless, DMBs continue to have a strong position, accounting for roughly 69 percent of all private sector loans.

However, the story is rather different when viewed through a narrower perspective. According to data from the CBN’s Quarterly Statistical Bulletin (QSB) for the second quarter of 2025, deposit money banks’ total lending as of the end of June 2025 was N58.2 trillion, indicating a modest 4% annual growth.

A shortfall of almost N16.5 trillion is implied by the difference between this figure and the larger PSCE total.

Analysts point out that a sizable portion of this discrepancy reflects credit provided by non-DMB institutions, such as development banks, microfinance lenders, and other specialized players, whose role has subtly expanded while traditional banks tread carefully. This discrepancy may be partially explained by timing differences between datasets.

This changing makeup indicates that, despite the banking system’s continued liquidity, risk appetite—particularly among major commercial lenders—has been curbed by strict regulations, worries about the quality of assets, and the requirement to protect capital in a volatile operating environment.

Credit Lags While Liquidity Grows

Ironically, significant expansion in important monetary aggregates is occurring along with the downturn in private sector credit. Both the narrow money supply (M2) and the broad money supply (M3) increased by 13% year over year to roughly N122.9 trillion and N123.0 trillion, respectively, indicating sufficient liquidity within the system.

The increase in net foreign assets, which reached N37.4 trillion after rising by 115% year over year, is even more startling.

This rapid growth is indicative of a significant improvement in Nigeria’s external cash situation, which was fueled by robust diaspora remittances and robust foreign portfolio inflows after foreign currency market reforms.

Nigeria’s external reserves, which increased by $4.6 billion annually to $45.5 billion for the entire year 2025, further highlight this tendency.

The CBN’s ability to handle external shocks, support the naira, and preserve confidence among foreign investors has been improved by the reserve build-up.

Liquidity by itself does not ensure lending, as evidenced by the weak transmission to private sector credit despite these favorable liquidity indications. The perception of risk, policy clarity, and price stability continue to be important factors in determining credit expansion.

The Story of Government Credit Is Different

A mixed picture is presented by credit extension to the government. Lending to the public sector fell precipitously by 33% year over year as a result of initiatives to stop deficit monetization and lessen the crowding out of private borrowers. Nonetheless, government credit increased by 6% month over month to N26.4 trillion, indicating sporadic funding need in the face of budgetary constraints.

Many people view the yearly decrease in government borrowing from the domestic banking system as a favorable structural change. Theoretically, it makes room for more private sector lending by reducing competition for bank funds. However, in reality, the advantages have not yet fully materialized because of the current monetary tightening and cautious bank practices.

Companies Feel the Pressure

The effects are evident for producers, merchants, and service providers. Particularly for small and medium-sized businesses, high loan rates have reduced margins, postponed capital expenditures, and limited working capital funding.

Many businesses are becoming more and more dependent on internal cash flows or outside sources of funding, such as unofficial credit markets and development finance organizations.

Economists contend that even though there will be short-term suffering, if macroeconomic stability is maintained, the long-term benefits could be substantial.

Eventually, lower risk premiums and a healthier credit cycle would be made possible by lower inflation, a more stable exchange rate, and greater external buffers.

2026: A Credit Revolution?

A less restricted domestic policy environment is anticipated in 2026. The CBN will probably have more leeway to reassess its position, including loosening policy rates and liquidity restrictions, if the inflation outlook softens and business conditions improve.

Deposit money banks, which are anticipated to emerge from the ongoing recapitalization process with stronger balance sheets and increased risk-bearing capacity, may be able to release pent-up demand for credit as a result of this change.

Large-scale projects, longer-term loans, and increased credit penetration across important economic sectors are all made possible by well-capitalized banks.

According to analysts, private sector credit growth might significantly rise in 2026 if monetary easing is well timed and based on persistent deflation, supporting output growth, job creation, and a wider economic recovery.

Maintaining Stability While Growing

In the end, the most recent figures emphasize the difficult balancing act that Nigeria’s monetary authorities must perform in order to maintain macroeconomic stability without restricting the credit required to spur growth.

The slowdown in private sector credit serves as a reminder that stabilization has a price, but it also shows that the groundwork for a longer-lasting expansion is being built.

The challenge will be to make sure that Nigeria’s increasing liquidity, better external position, and higher banks capital transfer into real-economy lending as inflation pressures lessen and confidence recovers.

The greatest economy in Africa may start a new, more sustainable loan cycle in 2026 if that transmission mechanism works as intended.