High Interest Rate: Manufacturers cut back on bank loans

For the first time in two years, credit to the manufacturing sector recorded a quarterly decline in 2024, following weakening appetite for bank loans among manufacturers as a result of the continuous interest rate hike by the Central Bank of Nigeria (CBN). In a bid to curtail the persistent rise in the inflation rate, the CBN in two years raised the benchmark interest rate, the Monetary Policy Rate, MPR, 13 times to 27.5 per cent November last year from 11.5% in April 2022. As a result, average maximum lending rates of banks rose to 31.06 per cent in November last year from 27.37 per cent in April 2022.

Vanguard investigations showed that the ensuing high interest rate regime has weakened appetite for bank loans among manufacturers. Industry experts and analysts, who confirmed this trend, said that manufacturers now either postpone investment decisions or seek alternatives to bank loans. Reflecting the impact of manufacturers’ apathy to bank loans, Credit to the Manufacturing fell by 6.67 percent, quarteron- quarter, QoQ to N8.67 trillion in the third quarter of 2024, Q3’24 from N9.29 trillion in the preceding quarter (Q2’24).

This represents the first quarterly decline in credit to the sector in two years since the third quarter of 2022, Q3’22. Analysis of the CBN statistics also showed that the credit allocation to the manufacturing sector maintained a quarterly upward trend from Q3’22 to Q2’24, before recording a decline in Q3’24. According to the apex bank, credit to manufacturers rose QoQ by 12.3 per cent to N5.10 trillion in Q3’22; and by 9.2 per cent to N5.57 trillion in Q4’22. This upward trend continued in 2023 as credit to the sector rose QoQ by 1.8 per cent to N5.67 trillion in Q1’23; by 23.1 per cent to N6.98 trillion in Q2’23; by 5.2 per cent to N7.34 trillion in Q3’23; and by 5.3 per cent to N7.73 trillion in Q4’23. Also in Q1’24, credit to manufacturers rose QoQ by 12.5 per cent to N8.70 trillion and again by 6.8 per cent to N9.29 trillion in Q2’24.

This upward trend was however reversed in Q3’24 when credit to the sector fell by 6.67 per cent to N8.67 trillion. Manufacturers seeking other funding options Speaking to Vanguard on this development, Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said many manufacturers may have opted for other sources of funding because it does not make sense to take fresh facilities at interest rates above 39 percent.

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. There is the challenge of the foreign exchange (FX) issue. Many of our manufacturers are highly import dependent. So they are very vulnerable to this weak currency or high exchange rate.

“There is the challenge of energy costs, the challenge of cost of logistics, the challenge of clearing cargoes at the ports, particularly their raw materials, and there is the challenge of weak purchasing power of the citizens. “So, the combination of all these factors may have been responsible for the decline in the manufacturers’ demand for credit. And in any case, with interest rates at over 30 percent, I don’t think it makes sense for any manufacturer to take fresh facilities at that cost. It makes more sense for them to seek other sources of funding.

“Most of what we have in the books of the banks now as credit still outstanding to manufacturers are existing credits that they are still struggling to service. “Very few manufacturers, if at all will go for fresh facilities at these very prohibitive and outrageous interest rates. “So, this is what must have been responsible for the decline. We are hoping that 2025 will be better, so that the manufacturers can have breathing space.”

Yusuf emphasised the need for the CBN to moderate its market oriented monetary policy in order to protect the real sector of the economy. According to him, it will be difficult for any business in the real sector, especially manufacturers and farmers, to thrive with an interest rate of over 32 percent and currency depreciation that has moved from nearly N500 to a dollar in June 2023 to over N1,600 per dollar since the return to orthodox monetary policy. High lending rates, output dcline discourage borrowing for investment- MAN On his part, Director General of MAN, Segun Ajayi-Kadir, stressed that the high lending rates coupled with other factors discourages borrowing to invest in manufacturing activities.

He said: “The 6.67% decline in credit to the manufacturing sector in Q3 2024 should not come as a surprise. There is hardly any positive indicator for the sector, as it has continued to struggle with increasing production cost and dwindling consumer purchases. “The sector is not insulated from the prevailing downturn in the economy occasioned by high energy cost, exorbitant exchange rate, escalating interest rate and rising inflation. These are disincentives to investment and expansion, and by extension, borrowing. “In specific terms, a high lending rate at above 30% would discourage borrowing to invest in manufacturing activities. Manufacturers mostly depend on credit to finance their operations, so when the cost of funding increases, they are less disposed to accessing credit.

“As I earlier mentioned, the astronomical increase in cost of power by 250%, together with incessant disruption decreases productivity and output, which also diminishes the loan appetite of the average manufacturer. When manufacturers produce less, they require less credit, and this will ultimately lead to a decline in credit to the sector.” stressed that the high lending rates coupled with other other factors discourages borrowing to invest in manufacturing activities He said: “The 6.67% decline in credit to the manufacturing sector in Q3 2024 should not come as a surprise. There is hardly any positive indicator for the sector, as it has continued to strugglewithincreasingproduction cost and dwindling consumer purchases. “The sector is not insulated from the prevailing downturn in theeconomyoccasionedbyhigh energycost, exorbitantexchange rate, escalating interest rate and rising inflation. These are disincentives to investment and expansion, and by extension borrowing. “Inspecificterms, ahighlending rate at above 30% would discourage borrowing to invest in manufacturingactivities.

Manufacturers mostly depend on credittofinancetheiroperations, so when the cost of funding increases, they are less disposed to accessing credit. “As I earlier mentioned, the astronomical increase in cost of power by 250%, together with incessant disruption decreases productivity and output, which also diminishes the loan appetite of the average manufacturer. When manufacturers produce less, they require less credit, and this with ultimately lead to a decline in credit to the sector.” Businesses postpone investment decisions Highlighting the various factors behind the decline in credit to the manufacturing sector in Q3’24, HeadofEquityResearch, FBNQuest Securities, Mr. Tunde Abidoye, said that the deceleration of credit growth to single digits can be attributed to the cautious stance of the banks, who are increasingly wary of accumulating non-performing loans (NPLs) in the context of a high-interest rate environment.

“According to data from CBN, banks ’NPLratiodeterioratedby 68 bps to c.4.58%, compared with 3.9% at the end of June 2024. “Beyond the banks’ conservative lending practices, another contributing factor may be the postponement of investment decisions by businesses, driven by the restrictive monetary policy implemented by the CBN. Also, analysts at Proshare noted that the growth in Nigeria’smanufacturing sector has been extremely modest in the past two years, reflecting the negative impact of the CBN’s hawkish monetary policy stance. They noted that in 2024, interest rates reached unprecedented levels, leading to elevated finance costs for numerous manufacturing companies. “Additionally, the high borrowing costs have significantly constrained the expansion of manufacturing activities. “Inflation has added a layer of pressure, as diminished purchasing power has resulted in lower sales volumes and output.

“The challenging macroeconomic conditions have led to several companies leaving Nigeria. In the first six months of last year, some manufacturing companies, including PZCussonsNigeria PLC, Kimberly-Clark Nigeria and Diageo Plc, exited the country, adding to the several multinationals that left in 2023. “In our view, the Federal Government must effectively implement feasible and proactive measures to encourage and boost production activities in the 13 sub-sectors of the manufacturing sector, especially food, beverage and tobacco, cement, and textile apparel & footwear – the top 3 drivers.