Senate’s move to fix interest rate won’t work.
Senate President Bukola Saraki said the Senate may restrict the quantity of government securities banks can buy. Saraki was of the opinion that banks were not lending because they were focused on government securities.
While the Senate may have altruistic reasons for this move, it is not looking at the larger picture. With inflation rates at 17%, it will be fool hardy for banks to lend below that rate. Factor in the infrastructure issues in the country, there is simply no way the banks can lend below 20%.
The economic crisis in the country, has also made banks reluctant to lend. The foreign exchange crisis caused many companies to record losses. This affected their ability to pay back loans. Banks had also lent to indigenous oil companies to enable them acquire several assets. A combination of the huge drop in oil prices, and militant attacks have left them struggling to pay loans. The lack of a comprehensive identity card system has made it difficult for banks to give out consumer loans. Employees of blue chip firms have cut down on such due to the rapid inflation and many of them being laid off. Civil servants that took loans also had difficulties paying when state governments had much lower FAAC allocations.
If the amount of government securities banks can buy is limited, the government itself may run into serious difficulties. The move by the Senate is an unnecessary one as the federal government had already indicated interest in reducing its domestic borrowing. This would lead to a reduction of the securities being issued by the CBN.
Forced legislation of interest rates have not worked anywhere in the world. The Kenyan government tried that and it was forced to backtrack. Rather than go down that route, the Senate and indeed the government should focus on passing critical bills such as the 2017 budget which remains in the cooler, half way through the year.