Emefiele’s reappointment

Chart of the day| Maximum lending rates from Nigerian Banks reached a 12 year high according to data from the Central bank of Nigeria (CBN) for February 2018. The CBN was yet to update its record for March 2018.

The data from the CBN shows Maximum lending rate is now 31.4%, the highest we have seen since the Central Bank started collating this data in 2006. The maximum lending rate is the highest average lending rate banks charge and is always higher than the Prime Lending Rate. CBN data keeps Prime Lending rate at 17.5% for February 2018 lower than the all-time high of 19.6% reported for November 2009.

The savings rate, which is the rate paid by banks to encourage saving money in the bank was 4.07% as at February 2018. The Savings deposit rate is typically low and single digits and is different from the Fixed deposit rate because unlike the latter it has no restriction or penalties on withdrawals.

Interest rate spread is wide as ever

The chart above reveals just how wide the gap between Savings, Prime and Maximum Lending Rates currently is in Nigeria. Between Savings and Prime Lending Rate the gap is about 13.5% while the gap between Savings deposit rates and the Maximum lending rate is a whopping 27.4%, the highest we have also seen since 2006.

Reason for the high-interest rate

The Nigerian Financial Sector has remained in a high-interest environment largely due to the hawkish monetary policy of the CBN. The CBN currently places its benchmark Monetary Policy Rate at 14% and just this week decided to leave it at 14% for the 22nd consecutive month.

The CBN cites the high inflationary environment of the last few years as a reason for its hawkish stand despite the fact that we have experienced a dis-inflation since 2017.

However, some economists who have spoken to us explain that the CBN’s quest to maintain a stable exchange rate is to blame and has largely contributed to the high-interest rate regime. They believe the CBN is determined to keep the exchange rate stable by keeping rates high so investors will prefer to invest in Naira than holding the dollar.

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This is buttressed by the fact that there is no longer a relationship between the inflation rate and high-interest rate. The expectation will be that as inflation rate tapers, the lending rate should follow in tandem but what we are witnessing is the exact opposite.

Lending risk vs Cost of funds axis

Bankers sometimes cite the high-risk environment as the reason why they often charge high lending rates. With non-performing loans ratios crossing 20% for some banks, they resort to higher yields to put a premium on the risk that they take when they lend money.

Some bankers also refer to the high cost of funds as a reason for charging such exorbitant rates. Banks spend billions in maintaining a sophisticated infrastructure, on customer acquisition and retention and also contribute a significant portion of the income to AMCON and other regulatory requirements.

2 COMMENTS

  1. If I take a loan from a bank at a rate eg 22% for a period of 36 months, is there possibility this rate will go up in the life of my loan repayment?

    • Yes there is a possibility that the rates will go up except it is a fixed interest rate. Nigerian banks rarely offer fixed interest rates.

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