‘Borrowing Appetite!’ Manufacturing Sector Credit Falls for the First Time in Two Years

The manufacturing sector in Nigeria has experienced its first quarterly decline in credit allocation in two years, attributed to reduced borrowing appetite among manufacturers. The decline follows continuous interest rate hikes by the Central Bank of Nigeria (CBN) aimed at curbing inflation.

Between April 2022 and November 2024, the CBN raised its benchmark Monetary Policy Rate (MPR) 13 times, from 11.5% to 27.5%. Consequently, the average maximum lending rate of banks surged to 31.06% in November 2024 from 27.37% in April 2022. This sharp increase in borrowing costs has discouraged manufacturers from seeking bank loans, leading to postponed investment decisions and a shift toward alternative funding sources.

Decline in Manufacturing Sector Credit
Data shows that credit to the manufacturing sector declined by 6.67% quarter-on-quarter (QoQ) to ₦8.67 trillion in the third quarter of 2024 (Q3 2024) from ₦9.29 trillion in Q2 2024. This is the first such decline since Q3 2022, breaking a consistent upward trend in credit allocation to the sector.

From Q3 2022 to Q2 2024, credit allocation to the manufacturing sector grew steadily, reaching ₦9.29 trillion in Q2 2024. However, the reversal in Q3 2024 underscores the increasing reluctance of manufacturers to engage with the high interest rate environment.

Expert Perspectives
Dr. Muda Yusuf, Chief Executive Officer of the Centre for the Promotion of Private Enterprise, highlighted that manufacturers are turning to alternative funding sources, as borrowing at rates exceeding 39% is unsustainable. He identified several challenges facing the sector, including foreign exchange volatility, high energy and logistics costs, port inefficiencies, and reduced consumer purchasing power.

According to Yusuf, many manufacturers are primarily servicing existing loans rather than seeking new ones.

“Most of what we see as credit outstanding to manufacturers are existing facilities they are struggling to service. Few, if any, are willing to take new loans at such prohibitive rates,”

he stated.

He called for the CBN to moderate its monetary policy stance, emphasizing the need for lower interest rates and a stable exchange rate to support the real sector.

“Manufacturers and farmers cannot thrive with interest rates above 32% and the currency depreciation we have witnessed,”

Yusuf added.

Impact on Investment
Segun Ajayi-Kadir, Director General of the Manufacturers Association of Nigeria (MAN), expressed concerns over the negative impact of high lending rates on manufacturing investments. He noted that rising production costs, high energy tariffs, and inflation have deterred borrowing for expansion.

Ajayi-Kadir said,

“The 6.67% decline in credit to the manufacturing sector should not come as a surprise. The sector continues to struggle with escalating costs and dwindling consumer demand. High lending rates exceeding 30% are a major disincentive to borrowing.”

He further pointed out that the recent 250% increase in energy costs and disruptions in power supply have led to reduced productivity and diminished loan appetite among manufacturers.

“When manufacturers produce less, they require less credit. This naturally leads to a decline in sectoral credit allocation,”

he explained.

Outlook for 2025
Industry stakeholders remain hopeful that 2025 will bring some relief to the manufacturing sector. They urge policymakers to implement measures that enhance the business environment, reduce borrowing costs, and address systemic challenges affecting production and investment. Stabilizing the exchange rate and moderating energy costs are seen as critical steps to revitalizing the sector and boosting its contribution to Nigeria’s economic growth.