Credit to the manufacturing sector has recorded a massive decline in 2024 due to the weakening appetite for bank loans by manufacturers.

Manufacturers do not go for these loans as a result of increasing interest rates by the Central Bank of Nigeria (CBN).

Recall that while trying to curtail the persistent rise in the inflation rate, the apex bank 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.

Due to this, the average maximum lending rates of banks increased to 31.06 per cent in November last year from 27.37 per cent in April 2022.

Analysts, who confirmed this trend, stated that manufacturers now either postpone investment decisions or seek alternatives to bank loans.

The Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, 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.

“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.”