Data from the Central Bank of Nigeria reveal average lending rate from commercial banks in the country has now topped 30% per annum. This is the first time in 16 years that average maximum lending rate will hit 30%. The last time lending rate was over 30% in Nigeria was in November 1999 just at the advent of the third republic.
Whilst some banks have lent above 30% in the past, the average for all banks have not crossed 30% since 1999.
Lending rates in Nigeria has been on the rise over the last two years as the economy grapples with a crushing recession that has severely depreciation government revenues as well as the value of the naira. The recession was largely triggered by a drop in oil prices as well as policy decisions taken by the government which many feel were ill-advised. These twin consequences of the recession is mainly attributed to the rise in interest rates in the country.
Depreciation of the naira
To cushion the depreciation of the naira and avoid speculative tendencies, the CBN has adopted a hawkish monetary policy that has ensured that interest rates continue to remain high. Higher interest rates it is believed will put less pressure on the need to flee the naira and hold on to dollar denominated assets. This is also one of the reasons why the CBN has kept its benchmark monetary policy rates as 14% for over a year now, sending a signal to commercial banks that it has no plans to lower lending rates.
Another possible reason for the high lending rate is due to the significant rise in government borrowing over the last couple of years. For example, bank claims to the Federal Government has risen from about N541 billion at the height of the oil price boom to over N5.6 trillion in March 2017. Government borrowing has also largely been dominated by Treasury Bills and FGN Bonds with yields ranging between 18% and 22% per annum.
Some Nigerian banks have already revealed that they will be tapering on lending to businesses and will instead re-balance their portfolios to focus more on purchasing government securities such as treasury bills and bonds. The effect of government borrowing and crowding out the private sector is worse enough not adding that they are borrowing at high interest rates.