Bank Customers Groan as Maximum Lending Rate Reached 28.75% in February

Kayode Tokede

Following the Central Bank of Nigeria hike in its Monetary Policy Rate, the maximum lending rate in the banking sector increased to 28.75 per cent in February, translating into high cost of borrowing by bank customers.

This was contained in the latest Money Market Indicators released by the CBN, which showed a 27.63 per cent maximum lending rate in January 2023.

The reported 28.75 per cent is a drop of 1.98 per cent when compared to 30.73 per cent reported in February 2022.

Maximum lending rate refers to the rate charged by commercial banks for lending to customers with low credit rating.

The lending rate had closed 2022 at 29.13 per cent on the backdrop of CBN hike in MPR to 16.5per cent.

The Money market indicators revealed that prime lending rate to most credit-worthy customers increased to 13.62 per cent in February 2023 from 13.62 per cent in January 2023.

Prime lending rate is averaging at 16.57per cent from January 2006 to January 2023 and it reached its all-time high of 19.66 per cent in November 2009 and a record low of 11.13 per cent in March 2021.

The prime lending is largely determined by the overnight rate which commercial banks lend one to another. The rate is also important for retail customers, as the rate directly affects the lending rates, which are available for mortgage, small business and personal loans.

Treasury bill rate was 2.09 per cent, one-month deposit rate was 7.56 per cent, three months deposit rate was 7.78 per cent, six months deposit rate was 8.91per cent, while 12 months deposit rate was 8.84 per cent.

The disparity between maximum lending and deposit rates have widened over the years.

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.

Analysts have attributed the increase in lending to the hike in MPR and severe macro economy challenges.

The CBN governor, Mr. Godwin Emefiele at the second Monetary Policy Committee (MPC) this year noted that the members debated on whether to continue its rate hike to further dampen the rising inflation trajectory or hold to observe emerging development and allow for the impact of the last five rate hikes to permeate the economy.

The National Institute of Credit Administration in a report stated that development and sustainability of micro, small, medium size enterprise (MSME) sector in Nigeria need to support businesses with single digit loans as high interest rates was affecting economic growth.

According to the report, “The higher the Monetary Policy Rate, the higher the interest rate charged on loans and lines of credits offered to MSMEs in the country. High interest rate is an albatross to any MSME.”

 The report further stated that, “Because of the scale and wherewithal of the MSMEs, these factors have significant impact on their profitability. Thus, not to further aggravate the problems, it is pertinent for MSMEs to have ‘Not too difficult’ access to single digit loans. CBN in conjunction with the developmental banks should create more sector-specific funds which MSMEs can access at single digits and without so much difficulties or strenuous conditions.”

It added, “Federal government can jump start growth and development in the MSME sector by implementing targeted tax incentive policies. While this may immediately lead to reduction in revenue generation of the government particularly in this dire period of dwindling government revenue, the medium to long term benefits on the economy cannot be over-emphasised. Federal Government can give tax incentives in specific areas.”

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

Olubunmi 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.”

The Vice president, Highcap Securities Limited, Mr. David Adnori had said the gap between the CBN’s lending rate and the maximum lending calls for concern in the banking sector.

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.”