A number of economists are worried about the high net interest margin of banks in Nigeria, which they believe is contributing to limited access to finance for small businesses. The net interest margin is the gap between the interest rate on loans and the interest rate on deposits. Banks charge a lending rate on loans to the private sector, while commercial banks offer a deposit interest rate on three-month deposits. Dr. Muda Yusuf, the CEO of the Center for the Promotion of Private Enterprise, highlighted that the gap between deposit and lending rates can reach up to 20%, ranking among the highest in the world.
He pointed out that the duration of funds within the banking system is notably brief. According to him, more than 80% of funds have a duration of one year or less, leading to a significant imbalance between assets and liabilities in the banking system. Limited access to credit for small businesses continues to be a significant obstacle to both economic development and inclusive growth. Despite contributing more than 50% to the GDP, small businesses in Nigeria receive less than 5% of the total credit available in the banking system.
Higher interest rates on loans result in higher borrowing expenses.
The financing gap for Small and medium-sized enterprises (SMEs) in the country is estimated to be around $32.2 billion, equivalent to over ₦40 trillion, according to the International Finance Corporation (IFC) analysis. Ensuring small businesses have minimal credit risks is crucial in the new era to stimulate economic growth, increase employment opportunities, and enhance financial inclusivity, Yusuf emphasized. The World Bank reported a decrease in interest rate spreads from 9.370 percent per annum in 2016 to 8.027 percent per annum in 2017. In the past seven years, the interest rate spread in Nigerian banks has surged to 20% and continues to rise.
Dr. Francis Akpochafor, a financial economist working at CashLinks, confirmed that a wide gap between deposit and lending rates has a significant impact on borrowers, especially individuals and small businesses. He posits that the higher interest rates on loans compared to deposit rates imposed by banks result in higher borrowing expenses for individuals and small businesses seeking credit for various purposes such as investment, consumption, or working capital. Exorbitant interest rates may discourage individuals from taking out loans, limit their ability to obtain credit, and hinder the development and progress of companies, ultimately hindering entrepreneurial endeavours and creativity.
Consumer spending and investment can be negatively impacted.
Huge differences in deposit and lending rates can widen economic disparities and hinder financial inclusion, especially for low-income families and marginalized groups. As banks focus on lending to customers with good credit scores who can pay higher rates, those with limited finances may find it difficult to obtain affordable loans. This perpetuates social inequalities and impedes inclusive economic growth, Dr. Akpochafor said. According to Henry Mamfe, a former professor of financial economics at the University of Buea in Cameroon, when there is a significant difference between deposit and lending rates, it can negatively impact consumer spending and investment. This, in turn, can result in slow economic growth and decreased productivity.
Mamfe pointed out that high borrowing costs can lead consumers to reduce their spending on non-essential items, put off big purchases, or impede investment opportunities, ultimately decreasing overall demand and causing economic growth to slow down. He also highlighted that businesses might scale down their investment strategies, postpone expansion initiatives, or cut back on hiring, limiting the formation of capital and hindering the creation of jobs. He added that a significant difference in deposit and lending rates could weaken the impact of monetary policy measures and interventions by the central bank in promoting economic growth and controlling inflation
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Consequently, the central bank may face challenges in regulating money supply, managing inflation, and maintaining economic stability due to this factor. Dr. David Nkwo, a financial economist from Ebonyi State University, states that a significant difference between deposit and lending rates could potentially erode consumer trust in the banking industry. This lack of trust may result in disintermediation as savers start looking for other investment opportunities beyond formal banking, which in turn could decrease the amount of deposits and overall liquidity in the banking sector.
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