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MSME

How much is a Nigerian Bank authorized to charge me as fees & interest rate?

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At some point in time there may be a need for you to request for a loan or an overdraft from a bank. You may need to finance a purchase of goods for supplies, buy a car, pay for rent, finance a mortgage, fund a business etc. All of these require some fund of debt financing. When you obtain a loan from a bank it is common that you get amongst others, terms and conditions such as ‘Tenor”, ‘Security”, ‘Interest Rate”, “Fees” and “Other Conditions”. Some of us are so in a hurry to draw down on the loans we just sign up the offer letter containing the terms and conditions without even reading the fine prints. Subsequently, we cry foul when the banks start to hit our accounts with all sorts of obnoxious charges. So, just what should a bank charge you?

According to the CBN Guideline on Rates and Charges the following should inform the interest rates and fees chargeable by a bank on a loan.
Interest Rates: In the CBN Circular of July 31, 2002 they had stipulated that Banks should not charge more that 400 (4%) basis points above the MRR (Minimum Rediscount Rate). The MRR was the rate that the CBN lent money to commercial banks. This instruction was reiterated in a circular issued on the 23 of April 2004. However, a circular issued on the 30 of April 2010 did not categorically refer to the maximum spread of 400 basis point. They replaced that by requiring banks to “quote lending rates as a fixed spread over Monetary Policy Rate (MPR) or any reference rate as may be determined by the CBN”. The MPR by the way replaced the MRR as the rate which the CBN lends money to the banks.
Currently, the MPR is 12%. So if a bank lends you money, they are now expected to quote the rate by stating clearly the spread. For example, MPR + 4% means you pay interest rate of 16%pa (per annum) with 4% being the spread. With this you can now track the following?
1. The interest rate a bank charges you against another bank. This is possible because their spread are all benchmarked against the same MPR.
2. Banks are typically fond of stating interest rates like this  “interest rate of 16% subject to market conditions”. The market conditions they refer to is the MPR. So if MPR drops to 10% expect your interest to drop to 14%. If it doesn’t you can take that up with your bank.
Fees: In the same circular(s) the CBN mandated that “banks are henceforth required to note that aggregate flat lending fees shall not be more than 200 basis (2%pa) points of the facility amount. The details of all fees shall be communicated to and agreed with the borrower and disclosed by the bank”. What this means in essence is that total of fees such as ‘Facility Fees”, “Management Fees” etc. must not exceed 2%. For example, if your Facility Fee is 1%, Management Fee is 1% then they cannot charge you any other fee.
So even if you sign an offer letter from a bank for a loan that contains fees in excess of 2% today or even 5 years ago, you can ask the bank to repay all the excess charges that you have incurred. Several companies have taken advantage of this and have been compensated by the banks with the full over charge along with interest.

Ugo Obi-chukwu "Ugodre" is a chartered accountant with over 16 years experience in financial management, corporate finance and financial analysis. He is also a retail investor and a personal finance advocate with over a decade experience investing in the Nigerian stock market.Ugo is the founder/Publisher of Nairametrics and blogs regularly on the website.

1 Comment

1 Comment

  1. Possicon

    March 15, 2012 at 2:11 pm

    Thank you for this insight. God bless.

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Columnists

How MSMEs can get easy access to finance

MSMEs must take the following steps for loan readiness.

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How MSMEs Can Get Easy Access to Finance

MSMEs are considered the backbone of the Nigerian economy. In 2019, they made up 90% of all registered businesses, contributed more than 50% of the country’s nominal GDP, and employ 84% of its labour force. Despite this, MSMEs were the recipients of less than 5% of all credit granted by the banking industry.

One reason for this is self-selection by MSME owners. Many MSMEs refuse to apply for loans from banks due to a fear of rejection and a belief that banks charge exorbitant fees and request hefty collateral before giving loans to MSMEs. Now more than ever, in this era of cashflow-based lending and low-interest rates, this harmful myth is costing businesses access to finance that they need to scale.

Another reason is the MSMEs’ lack of loan readiness. Unlike large companies, small business owners do not prepare themselves before applying for loans. This causes them to make many mistakes that discourage banks from lending to them due to a fear of non-repayment.

In order to overcome this hurdle and join large businesses in taking advantage of the low-interest climate, MSMEs must take the following steps for loan readiness:

1. Maintain financial records – Research shows that 69% of MSMEs in Nigeria do not keep detailed financial records. As a business owner, you must ensure that funds pass through your business account. Your business’s financial records as reflected in your bank statement will help your bank determine your repayment capacity. This is important, whether you want a collateral-free or collateral-based loan.

2. Use narrations for transfer into personal accounts – Again, always use your business account for business funds. However, if funds must be paid into your personal account for any reason, then ensure that those payments have a narration that reflects the purpose of the payment. For example, Two shirts purchased. This helps isolate business funds from personal when computing your turnover in order to determine your loan amount and repayment capacity.

3. Know what you want – Always know exactly how much you want and what you want it for. If your account officer asks you how much you want and you say “any amount you can give me”, they automatically assume you have no plan for the money or a plan for repayment. Before approaching your bank, determine how much you need and how much you can repay per month, using your monthly income.

4. Have a repayment plan – Always have a plan for repayment. Know how much you can afford to part with per month. Note however that your repayment plan might not align with that of the bank. Banks prefer not to take more than 33% of your monthly income in loan repayments, so your loan repayment period will probably be dependent on how much you can pay per month. Regardless, a well-thought-out repayment plan will build confidence in your repayment ability.

5. Engage your account officer– It is important to have an engagement with your account officer before applying for the loan. Instead of just writing a loan application letter to the bank and waiting for a response. Armed with your financial statement and your knowledge of how much you need and for how long, visit your account officer and have them work with you in getting your loan.


Ese Atakpu is a writer and banker.

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Commodities

AFEX raises $50 million to Finance Agri-SMEs in Nigeria

The $50 million Agri-SMEs fund is expected to bridge the funding gap between lenders and borrowers in the agric sector.

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AFEX to partner with FMDQ and Dubai Commodities Exchange, 50,000 farmers to benefit from AFEX Commodities agric funding initiative

AFEX Commodities Exchange Limited (AFEX), a private commodities exchange company, has announced the first Warehouse Receipt Backed Commercial Paper in Africa. The paper has tech-enabled operations and a 24-hour fast cash turnaround for borrowers.

This was disclosed by AFEX in a statement issued and seen by Nairametrics on Thursday.

The $50 million Agri-SMEs fund is expected to bridge the funding gap between lenders and borrowers in the Nigerian agricultural sector with a commodity-backed instrument – for the first time.

READ: AFEX partners FMDQ, Dubai Commodities Exchange to deepen markets opportunities

Ayodeji Balogun, CEO, AFEX, stated, “The AFEX financing deal will help eradicate the high cost of procurement incurred by processors by deploying a discounted value of a warehouse receipt distributed among five leading players in the Food and Beverage, Trading Poultry and Animal Feed segments in Nigeria.

“The receiving companies are top 10 players in their respective segments. They have now been enabled access to a tool for managing price volatility, enabling up to 30% direct savings on prices.

“With our vision to reach a cumulative total of over $5 Billion in investment to the agriculture sector over the next five years, this financing deal is right on track to achieve this goal.’’

He added that as AFEX move towards building a derivatives market in Africa, “we want to be able to reduce exposure to price risk for stakeholders, by enabling them to hedge their positions and trade in commodity derivatives.”

READ: CBN to increase loans to agricultural sector to 10% of total bank credit

Why it matters

  • The warehouse receipts, which can then be transferred from commodities to a financial asset and listed under the borrower’s portfolio on the AFEX trading platform, will create a sustainable funding structure and address underfunding in the Nigerian agricultural sector.
  • With the warehouse receipt system linked to financiers, the system allows financiers value and marks the commodities’ price to market on a real-time basis.

What you should know

  • AFEX’s mission is to provide low-risk working capital facility for stakeholders in the Agro sector, in a way that is transparent and has a very high viable investment return.
  • As a licensed commodities exchange and warehouse receipt system operator, it deploys a warehouse receipt system and collateral management infrastructure to increase market confidence for both lenders and borrower.

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