The disparity between lending and savings deposit rate in Nigeria is at a 10 year high of 26%, according to latest data from the Central Bank of Nigeria. For a lot of small businesses, micro and medium, this is a quagmire that they have got so very used to, just that this time, it’s at a different level.
Interest rate gap
Maximum lending rate, which is the maximum rate paid by borrowers in Nigeria topped 31%, the highest we have seen for over a decade. In contrast, savings deposit rate is at 4%, coincidentally the highest in 10 years too. The reality however is that, the disparity or otherwise premium at 26% is the highest we have seen on record for over a decade.
CBN’s hawkish monetary policy has been largely attributed to this premium as have been analysed on Nairametrics in the past. In its quest to stem the wave of naira chasing dollars, the CBN in 2016 began a policy of mopping up the local currency from banks at rates topping 20%. The apex bank did not also stop there, they have sold treasury bills to Nigerians at record levels, with one year bills topping 22% in yields.
The implication is that commercial banks, have no incentive to lend to the private sector, preferring to purchase government securities that are safer, offer tax benefits and easier to manage. Spice that up with net return of 16%, and they have more reasons not to lend to the private sector. The consequences are what we are now with the growth in the premium between the savings deposits and maximum lending rates. For any bank to lend to the private sector, it will have to demand a steep enough premium, that is in some cases 8-10% premium to what they would get if they invest in government securities.
Small businesses are paying for the opportunity cost banks incur in forgoing safer government borrowings and there appear to be no end in sight yet.