Strong indications have emerged that the federal government may be considering policies that could force Deposit Money Banks to reduce interest rate which has remained at between 25 and 30 per cent over the years. This high interest rate has frustrated every effort to boost the economy by compelling businessmen, entrepreneurs and manufacturers to borrow at unrealistic rates.
This has not only discourage investment and growth in economy and but also result in the high loan default in the financial system.
Reliable sources close told BusinessHallmark that government is concerned with the [present situation and seeking ways to ensure that the real sector is boosted and galvanised through fund inflow to grow the economy and realise President Buhari’s promise to create jobs.
He said the government was articulating an agenda which would include coercion, moral suasion and other measures that would encourage and ensure that the real sector gets the much needed credit lines to increase productivity.
According to him, the government had made promises of creating employment, funding education and hopes to generate more revenue from taxes to make up for the shortages emanating from shrinking revenues of crude which can only be achieved when more persons are gainfully employed. The leadership has over the years expressed concern that banks’ lending rates are too far higher than deposit rates and term deposit.
For instance, while banks charge a minimum and maximum lending rates of 25 and 30 per cent respectively, it pays four per cent and 11 per cent interest rates for savings deposits and Time deposits.
Last week Governor of Kaduna State, Malam Nasir El-Rufai, gave an indication of this when he warned banks to reduce interest rates or face political intervention that will force them to do so.
‘’I am warning the banks to bring down the rates or we will do it for you”, he said.
Whereas the banks have argued that the market, given the cost of funds determines the rates they sell money, businessmen, manufacturers and other firms that seek credit from the banks have cried out that they are dying.
Managing Director of Fidelity Bank, Mr. Nnamdi Okonkwo told BH recently that banks buy and sell money according to the dictates of the market.
” If I have 1million naira, and you want to borrow at nine per cent, get me deposit at 2 per cent. With N1Million, I have only N75,000 as a bank to trade with.
The cash reserve ratio will take N25,000. If I have paid the deposit for N100 and can only use N75, that cost would have increased.
I will still pay NDIC premium on the deposit, pay for diesel and staff salaries would have to be taken care of all from that money.
Since I buy money from taking deposit, I have to ensure that I take care of my overhead cost. By the time all of that is handled you would find out that I cannot lend at single digit with the rate of deposit”, he said.
Based on these conditions, analysts have expressed doubts that the decision by the government to force down interest rates can work given the process of buying and selling money to make profit.
Commenting on the issue, an economist with the Manufacturers Association of Nigeria (MAN), Ambrose Oruche doubts the feasibility of applying force or fixing rates to bring down interest rates in the country, adding that market forces may not allow in an environment where operating cost is very high.
He explained that Government could use moral suasion and instruments of law to encourage banks to keep lending rates low to help the manufacturers with liquidity to engage in meaningful productivity.
Similarly, former Managing Director of defunct ACB International, Chief Emma Nwosu said the idea of imposing lending rates on banks may not work. He argued that demand and supply are what determines the cost of funds.
”The banks have to make profit because they are selling money. And if you force banks to do that there will be corruption, capital flight and people may move production lines outside the country”, he said.
The Federal Government under President Jonathan had in 2013 unveiled plans to force rates down.
This had involved plans to establish special finance institutions that would attract funds into the economy at lower rates.
Former Minister of Finance and the Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala, had stated that the bank, which was to be established would lend funds to the Bank of Industry, Bank of Agriculture and commercial banks to ensure that interest rates were reduced to a sustainable level for indigenous industries to grow.
She had said the government was concerned about the high interest rates being charged by banks and was working to provide an enabling environment that would assist the banks to reduce the rates, especially for indigenous manufacturers and industrialists.