The Central Bank of Nigeria (CBN) quarterly economic report for Q4 2019 presented an opportunity to evaluate the impact of the apex bank’s regulations on the direction of official DMB’s lending and borrowing rates. Based on the report, Prime Lending Rate and the Maximum Lending Rate declined 0.3ppts and 1.2ppts respectively to 15.0% and 30.0% respectively in Q4 2019.
In addition, average term deposit rate declined 0.3ppts to 8.1% in Q4 2019. We, however, observed a steep decline in interbank lending rate which declined 5.4ppts to 3.4% in Q4 2019. We note however that for the banks we cover, average deposit rate is c.3%.
We recall the CBN announced a flurry of new regulations in Q3 2019 and Q4 2019 including the minimum LDR level of 60% (which was later increased to 65%) as well as banning local investors from participating in its Open Market Operation (OMO).
These policies led to downward pressure on lending rates due to increased liquidity as well as pressure on banks to create new loans. While data from CBN revealed some downward pressure, the rate of decline as reported by CBN is slower than expected. We understand that several banks have sent out emails reducing lending rates on consumer loans (e.g. GTB revised its QuickCredit rate to 1.33% per month from 1.75% previously).
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Historically, lending rates in Nigeria are typically sticky upwards i.e. banks hardly revise their lending rates lower even in the face of surplus liquidity. We believe this has led prime borrowers to explore the commercial paper market with companies like Eterna, Nigerian Breweries etc. raising working capital needs while Flour Mills raised medium-term financing at rates below the prime lending rate. We think banks are still reluctant to create loans that could dampen asset quality.
Nevertheless, we believe some choice borrowers are still able to take advantage of the excess liquidity to negotiate lower lending rates on a per contract basis.
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