In response to significant macroeconomic challenges and a surge in the Monetary Policy Rate (MPR), the prime lending rate of commercial banks to the majority of credit-worthy borrowers rose to 13.67% in January 2023, a YoY rise of 1.99% from 11.68% during January 2022. The Money Market Indicators of the Central Bank of Nigeria (CBN) showed a 24-month record in January, following the Monetary Policy Committee’s (MPC) 17.5 percent MPR raise. From 2006 to 2023, the prime lending rate averaged 16.57 percent, reaching 19.66 percent in November 2009 and 11.13 percent in March 2021. Prime lending is mostly governed by commercial banks’ swift lending rates. Retail customers must consider the rate because it affects mortgage, small enterprise, and personal loan rates.
According to report as of January 27, 2023, United Bank for Africa Plc had the largest amount of prime lending within the overall commerce sector, second by Unity Bank Plc. FCMB, as well as Stanbic IBTC Bank, had the highest general commerce sector maximum lending rate of 42%, next by Keystone Bank Limited (36%) and also Heritage Bank (35%). According to money market indicators, savings deposits rose to 4.29 percent in January 2023 against 1.25 percent in 2022. Since 2009, maximum lending rates have exceeded deposit rates by around 10%. In Nigeria, prime lending rates are granted to large corporations with a record of steady cash flows and low risks, whereas small enterprises and individuals that seem to have a higher risk are usually above the prime lending rate range. MPR hikes and macroeconomic issues have caused lending to rise, analysts say.
The MPC aims to boost economic development and achieve financial stability.
Also, Godwin Emefiele, governor of the CBN, acknowledged that the increase in MPR will hike borrowing costs, particularly for non-priority sectors of the economy. He stated that the 9% interest rate, which was set for lending to major priority sectors, which was identified to drive expansion while creating employment, would be maintained. According to him, the MPC has been working hard on policies to boost economic development and achieve financial stability. Thus, the resolution to raise interest rates was the last choice. Since inflation has been rising rapidly, driving up the cost of basic commodities like food, he said the CBN had decided to take a contractionary viewpoint on monetary policy.
Continuing on he said the Central Bank of Nigeria’s (CBN) move was made to reduce inflation and boost economic expansion. The MPC, he said, has a challenging choice on how much to hike the lending rate. In order to get inflation under control, he said, extreme measures like increasing the benchmark lending rate were necessary. Maximum lending rates also decreased slightly from 27.65 percent in January 2022 to 27.63 percent in January 2023, a decrease of 0.02 percentage points YoY. In banking terms, the maximum lending rate is the interest rate that borrowers with a low credit rating will pay.
Businesses would be impacted by the increase in lending rates.
Mr. Ayokunle Olubunmi, Head of Financial Institutions Ratings at Agusto & Co, in a conversation with THISDAY, said that the increment in MPR has influenced the average maximum lending rate from 2022. Of course, the hike would impact businesses and likely lower bank borrowing rates. He predicted that the increased interest rates would have a negative impact on the profitability of enterprises that had taken out loans. The increase in the interest rate may have discouraged borrowing by firms and consumers alike. He added that the CBN’s decision to increase the MPR is a contractionary monetary policy. Inflation is projected to be tamed as a result of the policy shift, as fewer people will be able to qualify for new loans.
Moreover, Mr. David Adnori, vice president of Highcap Securities Limited, commented, saying that the disparity between the lending rate of CBN and the maximum lending rate is cause for alarm in the banking sector. Adnori argues that the near-doubling discrepancy between the MPR and the average maximum lending rate is evidence of widespread complaints in the sector. When the MPR is higher than the average maximum loan rate, it is a sign of rampant rent-seeking in the banking industry that affects businesses.
No significant economic improvement to justify the increase – Ogubunka.
The President of the Bank Customers Association of Nigeria (BCAN), Dr. Uju Ogubunka, also said that the rise in the average maximum lending rate might be ascribed to rising prices and economic uncertainty as a result of political strife. Ogubunka stated that there had not been enough economic improvement in Nigeria in 2022 to justify an increase in the prime lending rate that banks offer to the real sector, and he emphasized that this increase in prime lending would likely lead to higher costs for doing operations in the country.