Nigeria’s Interest Rate spread—the difference between lending and deposit rates—has skyrocketed from 6% in 2023 to 19% in 2025, highlighting the profound inefficiencies in the banking industry. This widening disparity indicates that while banks are imposing significantly higher interest rates on loans for businesses and individuals, they continue to offer meager returns on deposits, effectively discouraging savings and stifling investment. The sharp escalation in the spread is fueled by a complex interplay of regulatory constraints, macroeconomic volatility, and deep-seated structural flaws within the financial system, exacerbating the cost of credit and limiting economic expansion.
The current interest rate spread, which surged to surpass the previous high rate recorded in 2010 when it peaked at 11.1 percent, poses a great deal of challenge to Nigeria’s economy. This increase was driven by a number of factors, with the Central Bank of Nigeria’s (CBN) strict regulatory framework being one of the main causes. High liquidity ratios, AMCON levies, NDIC charges, and the requirement that banks maintain a 50% Cash Reserve Ratio (CRR) have all limited banks’ capacity to make lower-interest loans. Strict monetary policies intended to control Inflation have raised benchmark interest rates, further driving up lending costs.
How record-high lending costs are stifling business growth.
High credit risks, caused by Nigeria’s unstable macroeconomic environment, also contribute to banks charging higher interest rates to offset any potential Loan defaults. In addition, inefficiencies in the banking industry and restricted access to reasonably priced borrowing have made the difference between lending and deposit rates even more pronounced. Record-high borrowing prices are making it difficult for businesses, especially small and medium-sized businesses (SMEs), to obtain cheap credit, which restricts their capacity to grow, add jobs, and support economic expansion.
Overall economic progress is slowed by the high lending rates, which deter new investments in key industries. At the same time, the low deposit returns also deter people from saving, which lowers capital accumulation and limits the amount of money that can be used for profitable ventures. In the long run, a persistently high-interest rate spread poses intense risks to economic stability. Loan-dependent businesses may struggle to maintain operations, which could result in lower Productivity and job losses. Foreign Investors may also be reluctant to invest in the Nigerian market due to the high cost of borrowing and financial instability, which would further limit capital inflows.
Broader economic consequences of rising lending costs.
As major organizations and wealthy individuals continue to prosper due to their access to preferential lending rates, while low-income individuals and smaller enterprises face exorbitant borrowing costs, the growing disparity between loan and deposit rates may also exacerbate income inequality. Many facets of society will be impacted by this widening interest rate differential. Higher borrowing costs will disproportionately affect businesses, particularly SMEs, making it more difficult for them to grow or even stay in business. Prices will go up for consumers as companies pass on higher borrowing expenses to consumers.
Employees may lose their jobs if financially troubled companies cut expenses. Repayments will be more difficult for households with existing loans, such as mortgages or auto loans, which will lower disposable income and total consumer expenditure. The poor returns on deposits will also make regular savers less inclined to retain their money in banks, which would further discourage financial inclusion and economic engagement. Addressing the issues raised by the growing loan-deposit gap necessitates targeted policy interventions. The CBN may need to review its monetary policies to find a middle ground between Financial Stability and economic growth.
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Moreover, a gradual recalibration of monetary policies is an essential first step to ensure that attempts to control inflation do not unduly restrict credit availability. The apex bank could also consider lowering the CRR from 50% to a more sustainable level while maintaining a tight monetary policy. A lower CRR would enable banks to provide loans at more affordable rates by increasing the amount of liquidity available for lending. Similarly, revising the requirements for liquidity ratios may help banks optimize their capital allocation without jeopardizing their financial stability. Enhancing the banking industry’s efficiency is another crucial step that could be considered in promoting competition and lowering inefficiencies.