Credit to government jumps 63% to N39.4 trillion as private lending slips

Credit to government jumped 63 per cent to N39.4 trillion in September 2026 while private-sector credit slipped, according to Nairametrics, a shift that shows how heavily Nigerian banks are lending to the state instead of businesses and households. The figure raises concerns about crowding out and the weak transmission of credit to the real economy.

Credit to government includes loans, securities and other claims on federal, state and local governments. When banks buy government bonds or lend directly to the public sector, they earn a relatively safe return. Lending to private businesses carries more risk, especially in a weak economy.

The 63 per cent increase is large by any measure. It suggests that the public sector’s borrowing needs have grown faster than private demand for credit, or that banks prefer the safety of government exposure. Either way, the composition of credit matters for growth.

Why banks prefer government paper

Government securities offer attractive yields with low credit risk. Banks can use them as collateral, hold them for liquidity and earn a steady return. In a period of currency volatility and high inflation, that safety is valuable.

Private lending is riskier. Businesses face weak demand, high input costs and uncertainty about policy. Households are stretched by inflation and unemployment. Banks that lend to them must hold more capital and provisions, which reduces profitability.

Regulatory requirements also encourage government exposure. Banks must hold liquid assets to meet stress tests and collateral demands. Government bonds qualify, while corporate loans do not.

The crowding-out effect

When banks lend to the government, less credit is available for the private sector. That can push up borrowing costs for businesses and reduce investment. The effect is strongest when government borrowing is large relative to the size of the financial system.

Nigeria’s private sector already faces high interest rates and limited access to long-term finance. Small and medium-sized enterprises, which create most jobs, are particularly affected. If banks prefer government paper, those businesses may be unable to fund expansion.

The crowding-out effect is not always complete. Banks can lend to both the government and the private sector if they have enough capital and liquidity. But in a constrained environment, the choice matters.

The fiscal dimension

Government borrowing is driven by the budget deficit. When revenue is insufficient to cover spending, the government issues debt. Banks are natural buyers because they have deposits and regulatory incentives.

The problem is that debt service consumes a growing share of revenue. Higher yields make borrowing more expensive, which can lead to a vicious cycle of more borrowing and higher taxes. That leaves less room for productive spending.

The government has tried to increase revenue through tax reform and subsidy removal. Those measures are necessary, but they take time to yield results. In the interim, the public sector will remain a large borrower.

What it means for the economy

Credit to government can be stabilizing in a crisis. It allows the state to fund essential services and avoid default. But when it dominates credit growth, it can starve the private sector of the capital needed to create jobs and expand output.

The decline in private-sector credit is particularly worrying. It suggests that businesses are not borrowing, either because they do not see profitable opportunities or because banks are unwilling to lend. Both explanations point to weak confidence.

Without private investment, productivity growth will lag and the economy will remain dependent on oil and consumption. That is not a recipe for sustainable development.

The policy response

The central bank can encourage private lending by adjusting risk weights, liquidity rules and capital requirements. It can also improve the credit infrastructure, including credit bureaus and collateral registries.

The government can reduce its borrowing needs by increasing revenue and cutting wasteful spending. That would free up capital for the private sector and lower interest rates over time.

Banks themselves need to improve risk management and develop products for underserved segments, including SMEs and agriculture. That requires investment in technology and skills.

The outlook

The N39.4 trillion credit-to-government figure is a warning about the structure of Nigeria’s financial system. Banks are doing what is rational for them, but the collective result may be bad for growth.

Reversing the trend will require coordinated action from fiscal and monetary authorities. It will also require patience, because the problems are structural and cannot be solved in a single quarter.

For investors, the message is to watch credit growth by sector. If private credit starts to recover, it will be a sign that confidence is returning. Until then, the economy will remain dependent on public spending.