CBN office, Abuja

Okey Onyenweaku

Interest rates most times determine the volume of money that is lent out to borrowers. While high interest rate narrows the volume of money that borrowers get, low rates increases the volume of money that leaves the banks’ vaults to borrowers.

Interest rates according to experts is the amount a lender charges a borrower and is a percentage of the principal of the amount loaned.

Over the years, the monetary authorities, the Central Bank of Nigeria (CBN) has deployed far reaching measures to ensure that interest rates are reasonable so that more credit could flow to the critical sectors of the economy for developmental purposes, especially to the manufacturing sector.

In order to achieve this, the CBN has been tinkering with the MPC rates from 14 per cent in 2019 to 13.5 and to 12.5 before bringing down to 11.5% all in effort push liquidity into the economy for growth. The MPC had retained the monetary policy rate at 11.5 per cent, with the asymmetric corridor of +100/-700 basis points around the MPR.

But this has not changed the rates that Deposit Money Banks charge for loans except for the interventions of the CBN with dedicated credit lines through the banks.

The committee has also voted to retain the Cash Reserve Ratio (CRR) at 27.5 per cent as well as the Liquidity Ratio at 30 per cent. Despite this effort prime lending rate was as high as 15.92% while maximum lending rate was as high as 30.73%.

Recently, the Central Bank in its monetary policy committee meeting held last week reiterated its preference for cheaper credit to the real sector of the economy citing its effect on spurring economic growth.

“The Committee noted that an expansionary stance of policy could transmit to reduced pricing of the loan portfolios of Deposit Money Banks and result, therefore, in cheaper credit to the real sector of the economy. On the converse, this expected transmission may be constrained by persisting security challenges and infrastructural deficits. On the other hand, while a contractionary stance will only address the monetary component of price development, supply side constraints such as the security crisis and infrastructural deficits can only be addressed by policies outside the purview of the Central Bank. A tight stance in the view of members, will also hamper the Bank’s objectives of providing low-cost credit to households, Micro Small and Medium Enterprises (MSMEs), Agriculture, and other output growth and employment stimulating sectors of the economy.” – CBN

However, as of April 2021, CBN data indicate prime and maximum lending rates were 11.24% and 28.64% respectively.

Of the rates, Business Hallmark observed that maximum interest rates to almost all the sectors appear to be high at about 28% to 30% and some as high as 45%. This is even as Prime Lending Rate data was reported at 11.670 % pa in Jun 2021.

Looking at the CBN weekly data the rate for Agriculture, Manufacturing, trading and general commerce, the maximum rate is not low.

For the Agricultural and Forestry sector, the rates are 28, 30, 32, 33, and 36% in some of the banks. For GT Bank, Ecobank, Unity Bank and Wema bank lending rates are 21%, 26% and 21% and 25%.

This records an increase from the previous number of 11.290 % pa for May 2021. The prime rates stood at 12% and 13% as at august 6, 2021.

Interest rates loans had been relatively lower in 2020, given the macro-economic environment which was plagued by Covid-19 and the low price of crude.

While lending rate stood at 3.25% as at August 2021: 1.4 % in Japan: 0.1% in UK, 1.3% in France and 3.50% in South Africa among others.

However, analysts believe that at the maximum rate of 28%, the banks do not think that with the prevailing macro-economic conditions the real sector has the capacity to borrow and repay loans. As a result, the banks according to them do not want to risk lending money to sectors that would cause problems and push up their non-performing loans.
Some market observers also believe that banks must factor in the risky operating environment and add the cost to their loans they give out. These are the reasons why only the blue -chips like NBPLC and Dangote Cement are the ones that are able to access credit at the prime rate of 15% -18%.

Commenting on the issue of high lending rates, Chief Executive Officer of High cap Securities, Mr. David Adonri told Business Hallmark that the banks are not comfortable with what the economy offers and cannot trust that the manufacturers can repay their loans at the market rate. ‘’That is why the banks do not want to extend credit to the real sector,” he said.

Dr. Adi Bongo, a senior lecturer at the Lagos Business school who shares a similar view with Adonri said the lending rates are determined by a lot of factors including macro-economic factors with their attendant environmental risks which are factored into the cost of money . ‘The CBN rate is different from the bank rates. The commercial bank rates are more realistic because they deal with real market rates,’’ he said.
CBN passes vote of confidence in DMBs

Meanwhile, the Central Bank of Nigeria (CBN) has reiterated that Nigerian Deposit Money Banks (DMBs) as well as the other financial institutions under its supervision are resilient, safe and sound.
CBN was reacting to what it called “false and unfounded stories circulating in the social media attacking the soundness and safety of some Nigerian banks.”

Addressing journalists at the weekend, the CBN’s acting Director, Corporate Communications Department, Mr. OsitaNwanisobi, stated that the banking system had proven to be sturdy, despite the global challenges posed by the COVID-19 pandemic.

He maintained that routine bank examinations and stress tests for financial institutions operating in the country indicated that no bank licensed by the CBN is currently under any form of financial distress.

Nwanisobi further stressed that the banks had adequate capital to absorb unexpected losses that may arise, pointing out that the central bank had continued to monitor the activities of banks to ensure that no individual or institution breached the laid down guidelines in line with the bank’s resolve to ensure adherence to prudential standards.

The CBN spokesman, who called on the banking public to disregard any report alleging insolvency in the Nigerian banking sector, reiterated the desire of the bank to prioritise financial inclusion as a measured approach to increase the number of adults included in financial services provided by banks in the country.

He urged the banking public to take advantage of the services provided by the banks, particularly the intervention programmes initiated by the CBN, to enhance their economic status and contribute to overall national development.

The apex bank had severally reassured the banking public about the soundness and safety of the financial system. The MPC had noted in the communiqué issued at the end of its meeting that the banking industry is in good health
According to the communiqué, “the Capital Adequacy Ratio (CAR) and the Liquidity Ratio (LR) both remained above their prudential limits at 15.8 and 38.9 per cent, respectively. The Non-Performing Loans (NPLs) at 5.89 per cent in April 2021 showed progressive improvement compared with 6.6 per cent in April 2020.”

Also recently, CBN Governor, Godwin Emefiele, emphasised the resilience of the banking sector amidst the impact of the pandemic.

He said: “Let me say that the Nigerian banking system remains very strong and resilient. I will say that unlike in other climes, the Nigerian banking industry appears to be one of the well-regulated industries in the world today.

“Our prudential ratio has been prescribed for the banks and they are required to ensure that they abide by those prudential ratios – for instance, the non-performing loans ratio, the capital adequacy ratio, and the liquidity ratio.”

He added that: “To demonstrate the fact that the Nigerian economy remains sound and resilient, as of May 2019, non-performing loans ratio in the industry was 11.1 per cent. As of June 2020, NPLs have dropped to 6.41 per cent.
“The capital adequacy ratio, which is a ratio that measures the size of capital that banks deployed into real assets, as of June 2019, was 15.2 per cent, but as of June 2020, it has just remained flat at 15 per cent.

“For liquidity ratio, by August 2019, it was 48 per cent but as of June 2020, liquidity ratio had dropped to 37 per cent. Yes, the liquidity ratio has dropped and I will say understandably so because, for instance, you will note that from around July 2019 to June 2020, gross loans and advances into the economy as a result of the CBN’s loan to deposit ratio had increased by N3.33 trillion from N15.6 trillion from June 2019 to N18.9 trillion as at June 2020.”

Emefiele explained that these loans were advanced to some of the productive sectors.

“For instance, the manufacturing sector received N315 billion, retail and consumer loan sector received N615 billion, the agricultural sector received N255 billion, general cotton received N221 billion, and information and communication technology received N206 billion.”

“What we are saying is that despite this large sums granted in a year from N15.6 trillion to N18.9 trillion, the prudential ratio still looks so strong; this is a clear indication that the Nigerian economy and the banking system remain very strong and resilient and able to support the economic development of Nigeria.”