Lending: Tier-2 Banks Lead as Maximum Lending Reached 29.13% in 2022

Kayode Tokede

On the backdrop of hike in maximum lending rate to 29.13 per cent in 2022, Tier-2 banks operating in Nigeria maintained high lending rates to customers in the year under review.

The latest data by the Central Bank of Nigeria (CBN) on banks’ deposit and lending interest rates showed that the 29.13 per cent average maximum lending in December 2022 from 27.58 per cent in December 2021 is the second highest in 2022 and it is coming on the heels of an increase in Monetary Policy Rate (MPC) to 16.5 per cent in 2022. 

The average maximum lending rate had hit 30.73 per cent in February 2022, the highest in the year under review.

With the 29.13 per cent average maximum lending rate in 2022, Tier-2 banks last year were widening their interest rate margin apparently to cushion the impact of rising inflation on their operating cost and profitability.

Maximum lending rate refers to the average of the highest lending rates charged by deposit money banks in Nigeria.

In the year under review, the members of the Monetary Policy Committee (MPC) of the CBN increased MPR fourth time, leading to most Tier-2 banks adjusting interest rate on loans to customers.

For instance, First City Monument Bank (FCMB)’s general business maximum lending rate remains flat at 42 per cent between January and November 2022, the highest in the banking sector and its prime lending rate at 19.50 per cent.

FCMB was closely followed by Stanbic IBTC with 36 per cent general maximum lending rate as of November 18, 2022 from 39per cent in December 31, 2021.

In addition, Keystone bank limited closed November 18, 2022 with a general maximum lending rate of about 36per cent as against 41 per cent in December 31, 2021.

On the other hand, most Tier-1 banks reported modest general business maximum ending rate in the year under review.

Zenith bank closed November 18, 2022 with general business maximum lending rate of about 30 per cent and it was at the same rate in 2021.

Similarly, the average prime lending rate rose by 2.17 percentage points to 13.85 per cent in in December 2022 against 11.68 per cent in December 2021.

Prime lending rate refers to the average prevailing lending rate charged by most deposit money banks in Nigeria to some of its more favoured customers.

Average prime lending rate reached 13.17 per cent in October when the MPC voted to increase MPR to 16.5 per cent from 15.5 per cent.

Findings by THISDAY also revealed that Heritage bank as of November 18, 2022 has one of the highest prime lending rate in the banking sector, followed by Unity Bank Plc.

Heritage bank in the period has 27 per cent general business prime lending rate, while Unity Bank with 26 per cent general prime lending rate came second.

Wema bank Plc and Providus Bank both have general business prime lending rate of 25 per cent as of November 18, 2022 respectively but Stanbic IBTC Bank with seven per cent general business prime lending rate has the lowest rate in the banking sector.

Further findings revealed that Tier-1 banks have lower prime lending rate.

Specifically, Guaranty Trust Bank (GTBank) in the period under review has 10 per cent general business prime lending rate.

The data further shows that the average interest rate on one-month deposit rose by 4.42 percentage points to 8.15 per cent in December 2022 from 3.73 per cent in December 2021, while average interest rate on 3-months deposits appreciated by 3.85 percentage points to 8.79 per cent in 2022 from 4.94 per cent in 2021 December.

The largest decline in deposit rate occurred on 12-month deposits as the average interest rate added 3.86 percentage points to 8.68 per cent in December from 6.79 per cent in December 2021.

The development, which indicates general rise in average maximum lending rates and 12-month deposit rates of banks, led to 15.28 per cent Year-till-Date (YtD) increase in banks’ interest margin.

Analysts have attributed the increase in interest margin to the hike in MPR and severe macro economic challenges in the year under review.

The disparity between maximum lending and deposit rates   have widened over the years particularly since 2009 topping a differential of about 10 per cent in most instances.

In Nigeria, large corporates perceived as having lesser risk with a history of generating consistent cash flows are offered prime lending rates, while small businesses and individuals perceived as having higher risk typically fall above the prime lending rate margin.

Commenting on the development, the Head, Financial Institutions Ratings at Agusto & Co, Mr. Ayokunle Olubunmi, said the gradual increase in MPR impacted on average maximum lending rate in 2022.

He noted that the increase, of course, would affect businesses and probably reduced borrowing rate in the banking sector.

He said, “For businesses that have taken loans, they will be paying more interest rate on these loans and it will affect their profitability. Also, any businesses or individuals that wanted to borrow money now will think twice amid hike in interest rate.”

He added that, “The hike in MPR by CBN is a contractionary monetary policy. The move is to reduce the number of people that will take new loans and it will reduce the amount of money in circulation which is expected to reduce inflation.”

Speaking from a different perspective, the Vice president, Highcap Securities Limited, Mr. David Adnori said the gap between the CBN’s lending rate and the maximum lending calls for concern in the banking industry.

According to Adnori, “The gap between the MPR and average maximum lending rate is almost doubled and it indicates a serious rant-seeking within the industry. The spread between the average maximum lending rate and MPR should not be more than 10 per cent and it means there is a serious rent-seeking activity in the banking sector that is eroding business activities.”

Responding also, the President, Bank Customers Association of Nigeria (BCAN), Dr. Uju Ogubunka attributed the increase in average maximum 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.

The Deputy Governor, Financial System Stability, CBN, Aishah Ahmad in her personal statement at the November 2022 MPC said, “As anticipated, average lending rates have risen between June and October 2022, partly driven by the tight monetary policy stance of the MPC, which requires vigilance by the banks to forestall defaults and preserve asset quality.

“Sustained implementation of the policy on GSI and effective credit risk management policies by the banks are useful in that regard, while recent initiatives of the Bank such as the naira redesign are expected to enhance monetary policy transmission via the banking system.

“Notwithstanding the strong financial system fundamentals and satisfactory stress test results, the Bank must remain vigilant and proactively manage operational, asset quality and other risks to financial system stability, especially with the challenging global economic environment.”