Even as broader liquidity indicators and external buffers rise, Nigeria’s private sector credit landscape is beginning to show symptoms of strain due to the Central Bank of Nigeria’s (CBN) extended tight monetary policy.
The system is trapped between macroeconomic stabilization and the pressing need to release growth-supporting credit, according to recent CBN statistics, paving the way for a potentially significant change in 2026.
Private sector credit extension (PSCE) increased by 0.3 percent month over month to N74.6 trillion in November 2025, according to the CBN.
Although the slight increase points to some resilience, the overall picture is less encouraging: PSCE fell by 2% year over year, highlighting the dampening effect of high interest rates and tight liquidity circumstances on borrowing and investment.
The CBN’s hawkish policy approach, which was used 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, forcing banks to be more selective when granting credit and causing companies to postpone expansion plans.
A Comprehensive Credit System Under Stress
Crucially, lending throughout Nigeria’s whole banking and credit ecosystem—not only deposit money banks (DMBs)—is included in the PSCE data. It consists of non-interest banks, microfinance banks, and state-owned development finance organizations like the Bank of India. Despite this, DMBs continue to hold a strong position, accounting for over 69% of all private sector loans.
However, a narrower lens presents a somewhat different image. As of the end of June 2025, total lending by deposit money banks was N58.2 trillion, according to data from the CBN’s Quarterly Statistical Bulletin (QSB) for the second quarter of 2025. This represents a modest 4% annual growth.
There appears to be a difference of about N16.5 trillion between this figure and the larger PSCE total.
While timing discrepancies between datasets may account for a portion of this discrepancy, analysts point out that a sizable portion represents credit provided by non-DMB institutions, such as development banks, microfinance lenders, and other specialized players, whose role has subtly grown as traditional banks exercise caution.
This changing makeup indicates that although the banking system is still liquid, policy restrictions, worries about asset quality, and the need to protect capital in a volatile operating environment have limited risk appetite, particularly among large commercial lenders.
Growing Liquidity, Falling Credit
Ironically, strong expansion in important monetary aggregates is occurring concurrently with a decline 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 in the system.
The increase in net foreign assets, which increased by 115 percent year over year to N37.4 trillion, is even more remarkable.
Due to robust diaspora remittances and robust foreign portfolio inflows following foreign exchange market reforms, Nigeria’s external cash situation has significantly improved, as evidenced by this fast expansion.
Nigeria’s external reserves, which increased by $4.6 billion annually to $45.5 billion in the full year 2025, further highlight this tendency.
The CBN is now better equipped to handle external shocks, support the naira, and keep foreign investors’ trust thanks to the reserve build-up.
However, transmission to private sector credit has been subdued despite these encouraging liquidity signals, which serves as a warning that lending is not guaranteed by liquidity alone. Credit expansion is still significantly influenced by price stability, risk perception, and policy clarity.
Government Credit Conveys a Different Image
A mixed picture is presented by the government’s credit extension. In an attempt to stop deficit monetization and lessen the crowding out of private borrowers, lending to the public sector fell precipitously by 33% on an annual basis. Government credit, however, 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 domestic banks as a favorable structural change. It makes room, at least in principle, for more private sector lending by reducing competition for bank funds. However, because of the current monetary constraint and cautious bank behavior, the gains have not yet fully materialized in practice.
Businesses Are Squeezed
The implications are real for traders, manufacturers, and service providers. High lending rates have limited working capital funding, delayed capital expenditures, and depressed profitability, especially for small and medium-sized businesses.
Internal cash flows or alternative financing sources, such as development finance organizations and unofficial credit markets, are becoming more and more important to many businesses.
Economists contend that if macroeconomic stability is maintained, the long-term benefits could be substantial, even while the short-term suffering is real.
Stronger external buffers, a more stable exchange rate, and lower inflation would gradually lower risk premiums and open the door to a more robust lending cycle.
2026: A Pivotal Year for Credit?
Expectations for a less restricted domestic policy environment in 2026 are growing. Improving business conditions and a lower inflation outlook will probably allow the CBN to reevaluate its position, possibly loosening policy rates and liquidity restrictions.
In particular, deposit money banks, which are anticipated to emerge from the ongoing recapitalization process with stronger balance sheets and increased risk-bearing capacity, could release pent-up credit demand as a result of this change.
Banks with adequate capital are better able to fund large-scale projects, offer longer-term loans, and increase credit penetration in important economic sectors.
According to analysts, private sector credit growth might significantly resume in 2026 if monetary easing is well timed and anchored on protracted deflation, enabling output expansion, job creation, and a wider economic recovery.
Growth and Stability in Balance
In the end, the most recent figures emphasize the difficult balancing act 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 more sustainable expansion is being established.
The challenge will be to make sure that Nigeria’s increasing liquidity, better external position, and greater banks capital transfer into real-economy lending as inflation pressures subside and confidence recovers.
The biggest economy in Africa may start a new, more sustainable loan cycle in 2026 if that transmission mechanism works.
