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Home Business News Politics

A Prof’s Uncanny Take On Why and How Lending Rate Must Go Down

Nairametrics by Nairametrics
January 20, 2014
in Politics
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The Director-General/Chief Executive Officer, West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, was interviewed by DANIEL ESSIET of The Nation in am interesting Q&A on monetary policy and its impact on the CBN. When asked about the impact quantitative easing will have on the economy he gave this sort of uncanny response about the need to bring down lening rate;

 

I have always argued that lending rates are too high; no one can borrow at 25 per cent to invest and pay back; the cost of fund is just too high. At some point, the apex bank was concerned about inflation hence the need to sustain or even raise the Monetary Policy Rate (MPR) which is now 12 per cent. The prevailing lending rates seem not to respond to the MPR; however, they seem to respond to a negligible extent to interbank rates. Now, we are told that inflation is now single digit (about eight per cent) and it may remain so for a while. Consequently, one problem is solved so why not direct attention towards lowering the interest rate.

I do not buy the foreign exchange argument in the sense that external reserves come mainly from exporting crude oil; its price and output are exogenously determined. We cannot rely on the market because the banking sub-sector is oligopolistic – few banks control the sector; sets the cost of funds and others follow or they collude. How come in spite of all the reforms, there are not that many new banks. In a market economy, the government can force competition by breaking monopolies and oligopolies either through the price angle or the quantity angle or both. It is high time the Central Bank of Nigeria (CBN) ‘forced’ down lending rates and the banks will adjust. It is only low lending rates that will stimulate the real sector thus grow the economy and generate the much needed jobs. Remember, teasing the banks will not help; afterall, prices (lending rates) are always sticky downwards. The shock therapy was given to banks concerning public deposits and they adjusted.

I am always in support of cutting interest rates. Negative real interest rates would imply that the system is awash with liquidity. However, in reality negative interest rates suggest that there is inconsistency between savings and investment and it is not healthy for the economy. It is always better to have positive interest rates.

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