Bank Raises Prime Lending Rate to 11.96% on Inflation, Hike in MPR

Kayode Tokede

On the backdrop of economic uncertainty, raising inflation and the hike in Monetary Policy Rate (MPR) to 13 per cent by the Central Bank of Nigeria (CBN), banks operating in the country have responded with prime lending increasing to 11.96 per cent in May from 11.83 per cent reported in April 2022.

The prime rate is the interest rate that banks charge their most creditworthy customers, generally large corporations.

The CBN had increased the MPR or interest rate to 13 per cent in response to global inflationary pressures, which has continued to hurt economies around the world.

The CBN in its “Money Market Indicators” data revealed that prime lending as of May 2022 reached its highest level this year and 16-month high when the MPR was 13.5 per cent in January 2020.

With the prime-lending rate reaching its highest level in 2022, the  CBN data revealed that the maximum lending rate dropped lowest in 2022, as banks move to attract more lending to customers.

Maximum lending rate dropped to 27.37 per cent, a 0.42 basis points decline from 27.79 per cent reported by CBN in April 2022, while interest on saving deposit closed May 2022 at 1.37 per cent, highest so far this year. 

The interest rate on treasury bills (T-bill) increased to 2.12 per cent in May from 1.74 per cent in April 2022.

The CBN had announced a TBills for 1-year tenor worth N143.88 billion, which was auctioned on Wednesday, 25th of May 2022, accumulated a total subscription of N210.82 billion, representing 147 per cent of the intended capital raise.

According to the result of the auction, the stop rate for the 364-day Tbills was 6.49per cent, which is higher than the 4.7per cent marginal rate recorded in the previous auction.

The apex bank recorded a total subscription of N236.97 billion for the three tranches of Tbills auctioned as against the N153.03 billion intended offer. This represents a 155per cent subscription rate, while the final aggregate allotment was N173.48 billion.

According to analysts, the decline in maximum lending rate and saving deposit rate is targeted at attracting more customers borrowing and savings in the banking sector.  

Speaking with THISDAY, vice president, Highcap Securities Limited, Mr. David Adnori lamented over the increase in prime lending rate to MPR, stressing that gap between the CBN’s lending rate and the prime lending calls for concern in the banking industry.

According to “The gap is almost like double-digit and it indicates a serious rant-seeking within the banking industry.

“The spread between the prime lending rate and MPR should not be more than 10 per cent but when you have something more than 100 per cent, it means there is a serious rent-seeking activity in the banking sector that is eroding the nation’s economy of resources.”

On his part, the President, Bank Customers Association of Nigeria (BCAN), Dr. Uju Ogubunka attributed the increase in prime lending rate to uncertainty surrounding and inflation rate in the business environment amid political tension.

Ogubunka said Nigeria’s economy in 2022 has not witnessed major improvement to warrant a hike in banking lending rate to the real sector, stressing that the hike in prime lending is expected to impact increase cost of doing business in the country.

Also speking, the President of the Association of the Capital Market Academics in Nigeria (ACMAN), Professor Uche Uwaleke said the decline in maximum lending rate is as a result of excess liquidity in the banking sector, stating that the interventions by CBN also forced banks to cut interest rate on loans to customers.

He explained, “When the money supply is high, it is expected to translate into low interest rates on lending to Bank customers. The numerous interventions by CBN have forced down interest rates in the banking sector. The CBN has a lot of its intervention at single digit interest rate; moved from nine per cent to five per cent. When the CBN should have ended that regime of five per cent lending rate, it extended it further.

“The CBN has been extending loan facilities to key sectors of the economy and a lot of interventions are accessing these funds at single digit interest rate.  The banks were forced to reduce interest rate in order to remain relevant in their major core business of lending to the real sector.”

He said that the gap between saving and lending rates is massive, stressing that the CBN management have expressed concerns.

Commenting on increase in deposit rate, he said that the hike in deposit rate is meant to attract deposits and remain competitive. It is the competition that is pushing up interest on deposits in the banking sector.”

The CBN Governor, Mr. Godwin Emefiele had recently admitted that the hike in MPR would increase cost of borrowing, especially in non-priority sectors of the economy.

Emefiele, however added that lending to key priority sectors, which had been identified to boost growth and generate employment, would remain at a single-digit interest rate of nine per cent.

He pointed out that the decision to raise interest rate was the last resort and a difficult one for the MPC, which had been crafting policies to stimulate economic growth as well as achieve financial stability.

He said the CBN had adopted a contractionary monetary policy stance in view of the aggressive rise in inflation in recent times, which had led to high food and commodity prices in the country.

Emefiele noted that CBN’s action was aimed at curbing inflation, on the one hand, and supporting growth of the economy, on the other. He said the MPC was in a dilemma in arriving at a decision to raise the lending rate.

As a result, the apex bank governor explained, a drastic measure such as raising the benchmark lending rate was required to reduce monetary expansion in order to tame inflation.

He assured that though inflation was expected to maintain an aggressive acceleration in the coming months, the central bank would not hesitate to return to its accommodative stance whenever it saw a reduction in the headline index.

Emefiele said, “The concerns about the global rise in inflation and price levels; you all would have seen that the price of crude quite unexpectedly has been above $100 per barrel. In fact, Nigeria’s Bonny light yesterday, when we started the meeting, was about $116 per barrel.

“What this means is that the standard pricing indicator; yes, whereas crude prices have gone up per barrel, at the same time the cost of refining and ultimate pump price at the station would naturally have gone up.”

He added, “For us in Nigeria, you would have observed that in the last two and a half years, what we have been doing is that we want to pursue a policy of price stability that is conducive to growth and that’s why somehow we have used our development finance intervention facilities, we have actually yielded positive results and helped to drive growth in our economy.

“We’ve used that to drive growth while at the same time we try as much as possible to maintain a hold position while looking at the optimum level of liquidity in the industry to be able to moderate inflation at a level that does not hurt the growth and economy of our country.

“But with what we have seen globally either in the areas of the supply chain, increases in prices of petroleum products, and the rest of them, we have seen aggressive growth in inflation in Nigeria between March and April of 2022.

“And the forecast from our statisticians, including the NBS and CBN as well as our colleagues in research and monetary policy, is that unless something drastic or significant actions are taken, it will be difficult for us to really rein in inflation if we don’t do something immediately.

“This decision has been taken because we felt that there may continue in the next couple of months to be an aggressive acceleration in inflation and we think there is a need to take some drastic actions to reverse it.

“If we are able to see a reversal, perhaps, we can say we are returning to what we can call the normal period, when we are looking at using CRR to moderate inflation and at the same time using our development finance to really push for growth.”