The last Chike checked the interest rate on his personal loan, his bank was still charging him 23%. This was for the period ended October 31, 2015. This seemingly high interest rate that has made him choose to repay my loans faster than planned is probably about to drop to 18% if the current monetary easing (pumping of cash into the economy) embarked upon by the CBN is successful. That 5% drop could save him N30,000 monthly, he projects.
The Central Bank has been pumping cash into the economy for the last few weeks and the effects are currently being felt in the entire financial markets. As at Wednesday 2015, 91 and 182 days treasury bills yield are at 1.7% and 4.3% respectively. 10 year FGN bond yields are also at 10% whilst corporate bonds have also been dropping. For example, C&I Leasing’s corporate bond with a coupon rate of 18% now has a yield of 7%. The question on the mind of a lot analysts is whether this trend will be felt by retail borrowers who have for years been groaning in high interest rate debts.
Analysts spoken to by Nairametrics suggest the interest rate windfall may soon be felt by retail borrowers. They opine that the CBN’s reason for all of this is to ensure small businesses not just have access to loans but at a cheap rate. However, lending rates some believe will only drop if the CBN reduces MRP from 13% to between 9 and 10%. The likelihood of that even happening is next to impossible as inflation rate is expected to come in higher when the Bureau of Statistics releases its numbers next month.
Nevertheless, borrowing rates are still expected to drop provided the CBN elongates its liquidity easing. Corporates are probably in line to benefit before retail lenders as many will now be eyeing renegotiation of their loans. The end of the year is typically the best time to refinance and renegotiate running loans and we expect rates to go lower if this trend is sustained.
Retail investors like Chike can only hope that the CBN gets banks to review their lending rates in line with the latest developments. The fear of a recession or deflation appears more serious than inflation for now and we won’t be surprised if MPR is tapered down to further boost liquidity. Since inflation in the country is more supply side than demand the believe is that the CBN may yield on MPR in other to stimulate bank lending and to a larger extent boost economic growth.
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Banks also recognize the power of retail lending but have gotten their fingers burnt in the last few years. It is still a huge learning curve for them as they are yet to figure out the right model for a dynamic market like Nigeria. However, with lower interest rates more middle class Nigerians can obtain new loans, refinance old ones and find new appetite to borrow more. It’s a value proposition banks appreciate but will not undertake until there are enough signs that the current CBN policy is not a smokescreen.
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