Over half a year ago I wrote a blog post about the increasing interest rates at which the government was borrowing. Then I called it an Interest Rate Party for the government , the Banks, Pension Funds and other fixed income investors. Well, the party is still on as interest rates remain on a rise with no sign of abating. Sadly, just as there is no respite for borrowers, who bear the burden, there is also none for bank depositors who have seen the value of their deposits erode over time. The spread between deposit and lending rates are nearing the five time high of 2010 as the following chart depicts;
Interest Rate Spread 2007-2011
And in 2012
According to the latest monthly report of the CBN (April) the spread between the Average Deposit Rates and Average Maximum lending rate was about 16.48% whilst the average savings deposit rate and the maximum lending rate was 21.56%.This is by far a remarkable development in the economic fabric of Nigeria. Most gloss over this issue as one of those things but it certainly is not. This is a pure case of arbitrage against the Nigerian people. The Banks and other deposit money institutions are cashing in on a market anomaly leaving the customers for dead. The Government on the other hand can’t complain as they borrow and spend and leave the future generation to bear the burden. Even term deposits with a 12 month maturity period have rates that a still below the Inflation Rate currently put at 12.9% (June 2012), making their cash a lot less in value as well.
The CBN will say they have issued guidelines in the past instructing banks to benchmark interest rates on the Monetary Policy Rates of 12%. But that in itself is unachievable in an economy where the Government borrow at 15-17% and use the money for mostly recurrent expenditure. Banks will prefer to lend to the government above lending to the real sector of the economy who in every sense of the word are the drivers of economic growth and jobs. The mantra for now is jack, jack and jack up interest rates to the public. Afterall the excuse is that inflation is high and government borrowing cost is increasing. Also, why should they lend to the public at the same rate at which they lend to the public who in this case are riskier. Sadly, the depositors are left with fewer options as the CBN strive to ensure a lot more money finds its way into the banking system and probably remain there.
So check it out, assuming a trader A deposits N1m into a bank for year the most he gets in interest rates will be 10%-11%. However, the bank lends that same money to trader B for between 26%-27%. The Bank has more than doubled the interest on your money. Brisk business right, like cash and carry. Like during the margin loan days, the banks are for now charging businesses rates that they can’t afford to pay and lending to government who do not have any other source of repayment apart from oil revenues, printing more money or perhaps borrowing more. Imagining how this will end makes for a suspense movie. I just hope this is not the foundation of yet another banking crisis. After all, according to the CBN 76.2% of the Domestic portion of the country’s public debt are held by the Banks.