Kayode Tokede
Following the recent decrease in the Monetary Policy Rate (MPR) to 26.75 per cent by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), the average maximum lending rate in Nigeria’s banking sector dropped to 28.89 per cent in July 2024 from 29.11 per cent in June 2024.
The maximum lending rate represents the upper limit of interest rates for loans to the sector, which may apply to higher-risk scenarios or different loan structures.
With the average maximum lending rate at 28.89 per cent, bank customers are expected to see an increase in lending to real sectors, which could contribute to weak business activities.
The banking sector lending rate in Nigeria has had an average of 14.17 per cent from 1961 until 2024, reaching an all-time high of 37.80 per cent in September 1993 and a record low of 6.00 per cent in April 1975.
In 2020, the average maximum lending rate peaked at 30.73 per cent when the MPR rate stood at 13.5 per cent.
An analysis of the CBN Money market indicator data reveals that the average maximum lending rate in January 2024 was 27.07 per cent when the MPR was at 18.75 per cent. It then dropped to 26.55 per cent in February 2024 when the monetary policy committee of CBN raised the MPR to 22.75 per cent.
In March and April 2024, the banking sector’s average maximum lending rate stood at 29.38 per cent and 29.49 per cent, respectively, amid a 24.75 per cent MPR.
However, in May 2024, the average maximum lending rate was at 28.67 per cent when the MPR stood at 26.25 per cent. By June 2024, the average maximum lending rate reached a new record of 29.11 per cent, while the MPR remained at 26.25 per cent.
In an effort to tighten liquidity and curb rising inflation, the MPR hike to 26.75 per cent led to a drop in the banking sector’s average maximum lending rate to 28.89 per cent, as revealed by the CBN’s money market indicator.
However, the significant increase in the policy rate has raised concerns about the potential impact on the cost of credit for businesses that are already facing economic hardships.
Each bank offers different lending rates that reflect their respective approaches to lending to the manufacturing sector.
As of July 5, 2024, data from the CBN shows that in the manufacturing sector, Stanbic IBTC Bank has the highest maximum lending rate in the banking sector, followed by FCMB, Sterling Bank Plc, and Unity Bank Plc.
Stanbic IBTC reported a maximum lending rate of 50 per cent, while FCMB, Unity Bank, and Sterling Bank reported rates of 40 per cent, 38 per cent, and 37 per cent, respectively, in the manufacturing sector.
The Manufacturers Association of Nigeria (MAN) has expressed concern over the average maximum lending rate charged by banks on loans to its members, which rose to 35 per cent in the second quarter (Q2) of 2024, up from 28.6 per cent in the first quarter (Q1) of 2024.
The MAN report indicates that lending rates to manufacturers during the period under review were 30 per cent on average for Zenith Bank Plc, and 32 per cent for Access Bank Plc and the United Bank for Africa (UBA) each. First Bank of Nigeria Plc and Ecobank Plc reported rates of 35 per cent.
The report states: “The continuous hikes in MPR have tightened financial conditions for the productive sector, with the average maximum lending rate charged by commercial banks on manufacturers’ finances rising to 35 per cent in Q2 2024 from 28.6 per cent in Q1 2024.”
Analysts predict that the maximum lending rate is likely to increase further as the MPC of the CBN raised the rate to 26.75 per cent in its late meeting in June 2024.
The average maximum lending rate closed 2023 at 26.62 per cent following the CBN’s hike in MPR to 18.75 per cent.
The unexpected rise in MPR has impacted the banking sector lending rate as the CBN aims to tackle inflationary pressure.
This unprecedented move not only sets the MPR at its highest level to date but also reflects the CBN’s determined effort to address the persistent pressure on foreign exchange and inflation.
The decision has received praise from the International Monetary Fund (IMF), which commended the MPC’s resolve to tighten monetary policy by increasing the policy rate to 26.75 per cent.
Analysts attribute the increase in lending to the hike in MPR and severe macroeconomic challenges.
The recent announcement made by CBN Governor, Dr. Yemi Cardoso, highlighted the central bank’s proactive approach towards monetary tightening amidst challenging economic conditions.
According to analysts at FBN Quest, the rate hike will slow economic growth and reduce consumer spending.
The report also shows that the average prime lending rate rose to 15.85 per cent in June 2024, compared to 13.85 per cent in June 2023.
The money market data by the CBN shows that the average prime lending rate reached the highest peak since amid an uptick in the Monetary Policy Rate (MPR).
Fitch Ratings projects that the CBN will maintain its stance on tightening policy in the near term, which seems necessary to more fully control inflation as rapid credit and money-supply growth suggests a still-loose monetary context.
Implementing such tightening measures may face challenges, partly due to potential countervailing political pressure. However, without further significant monetary tightening, it may be difficult to achieve macroeconomic stability as real interest rates remain negative, deterring inward portfolio investment, Fitch Ratings added.
Investment Banker & Stockbroker, Mr. Tajudeen Olayinka, stated that banks review their lending rates regularly, based on their respective cost of funds and the direction of the MPR, rather than using the MPR as a distinct value.
He noted that the MPR signals to banks the direction of interest rates in the market and the price they will pay if they have to borrow from or lend to the CBN.
Therefore, their deposit mix, which includes idle customers’ deposits, determines their weighted average cost of funds. They then factor in the signal from the MPR to arrive at their various prime lending rates, usually reserved for their prime customers.
However, with the recent circulars from the CBN concerning idle deposits and foreign exchange windfalls, the market should prepare for a prolonged high-interest rate regime. CBN seems to lack a good understanding of its recent destructive policies, he added.
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