Manufacturers Shun Bank Loans as Interest Rates Hit Record High
For the first time in two years, credit to Nigeria’s manufacturing sector declined in Q3 2024, reflecting the impact of soaring interest rates on manufacturers’ appetite for bank loans. Data from the Central Bank of Nigeria (CBN) shows credit to the sector dropped by 6.67% to ₦8.67 trillion from ₦9.29 trillion in Q2 2024.
The decline follows the CBN’s aggressive monetary policy, which raised the Monetary Policy Rate (MPR) 13 times in two years, reaching 27.5% by November 2024, up from 11.5% in April 2022. Consequently, average maximum lending rates rose to 31.06% in November 2024 from 27.37% in April 2022.
Dr. Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), attributed the decline to manufacturers turning to alternative funding options due to exorbitant borrowing costs.
He stated:
“The manufacturing sector is struggling at this time and it has been like that for the past two years. The challenges facing the sector are enormous and, unfortunately, those challenges have not abated… With interest rates at over 30%, I don’t think it makes sense for any manufacturer to take fresh facilities at that cost.”
Yusuf highlighted other challenges, including foreign exchange issues, high energy costs, weak purchasing power, and port delays, as factors discouraging borrowing.
CBN data reveals that credit to manufacturers had consistently increased from ₦5.10 trillion in Q3 2022 to ₦9.29 trillion in Q2 2024. However, the downward reversal in Q3 2024 marks the first quarterly drop since Q3 2022.
Segun Ajayi-Kadir, Director General of the Manufacturers Association of Nigeria (MAN), explained that rising costs, inflation, and high lending rates exceeding 30% are significant disincentives for borrowing.
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“The 6.67% decline in credit to the manufacturing sector in Q3 2024 should not come as a surprise. The sector continues to struggle with increasing production costs and dwindling consumer purchases,” Ajayi-Kadir noted.
He added that the 250% hike in power costs and other challenges reduce productivity, further dampening manufacturers’ demand for credit.
Tunde Abidoye, Head of Equity Research at FBNQuest Securities, highlighted that banks are adopting a conservative lending approach due to the rise in non-performing loans (NPLs), which increased to 4.58% in June 2024 from 3.9%.
Analysts at Proshare emphasized that elevated interest rates and inflation have constrained manufacturing expansion, with several companies exiting Nigeria in recent years. They urged the government to implement measures to boost production, especially in key subsectors like food, cement, and textiles.
As manufacturers navigate these challenges, stakeholders hope for better conditions in 2025 to foster growth and investment in Nigeria’s struggling manufacturing sector.
