Average Maximum Lending Rate Decline by 28.89% Amid MPR Hike

Kayode Tokede

On the back of the recent in Monetary Policy Rate (MPR) to 26.75 per cent, by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), the average maximum lending rate in Nigeria’s banking sector dropped to 28.89 per cent in July 2024 from 29.11 per cent June 2024. 

Maximum lending rate is upper limit of interest rates for loans to the sector, which might apply to higher-risk scenarios or different loan structures.

With the average maximum lending rate at 28.89 per cent, bank customers are expected to witness a hike on lending to real sectors, a factor contributing to weak business activities.

The banking sector lending rate in Nigeria averaged 14.17 per cent from 1961 until 2024, reaching an all-time high of 37.80 per cent in September of 1993 and a record low of 6.00 per cent in April of 1975.

In 2020, the average maximum lending rate reached a peak of 30.73 per cent when the MPR rate stood at 13.5 per cent

Analysis of the CBN “Money market indicator” data revealed that the average maximum lending rate opened January 2024 was at 27.07 per cent when MPR was at 18.75 per cent and dropped to 26.55 per cent in February 2024, when the monetary policy committee of CBN hike MPR to 22.75 per cent.

In March and April 2024, the banking sector average maximum lending rate stood at 29.38 per cent and 29.49 per cent, respectively, amid 24.75 per cent MPR.

However, in May 2024, the average maximum lending rate was at 28.67 per cent when the MPR stood at 26.25 per cent. Before the end of half year of 2024, average maximum lending rate hits a new record of 29.11 per cent in June 2024, while the MPR was flat at 26.25 per cent.

In a move to tightening liquidity and curb raising inflation the MPR of the hike MPR to 26.75 and the banking sector average maximum lending rate dropped to 28.89 per cent, the CBN’s money market indicator revealed. 

However, the steep increase in the policy rate has sparked concerns regarding the potential impact on the cost of credit for businesses already facing economic hardships.

Each bank offers different lending rates that reflect their respective approaches to lending to the manufacturing sector.

As of July 5, 2024, THISDAY gathered from CBN’s data that in the manufacturing sector,  Stanbic IBTC Bank, followed by FCMB, Sterling Bank Plc and Unity Bank Plc have the highest maximum lending rate in the banking sector.

Stanbic IBTC reported a maximum lending rate of 50 per cent; FCMB, 40 per cent; Unity Bank, 38 per cent and , Sterling Bank, 37 per cent in the manufacturing sector.

The Manufacturers Association of Nigeria (MAN) had lamented that the average maximum lending rate charged by banks on loans to its members rose to 35 per cent in second quarter (Q2) of 2024, up from 28.6 per cent in first quarter (Q1) of 2024.

The report by MAN had showed that the aggregate index score of the manufacturing sector decreased from 53.5 points to 51.9 point in Q2 2024.

Furthermore, the report indicated that lending rate to manufacturers during the period under review for Zenith Bank Plc was 30 per cent on the average while Access Bank Plc and the United Bank for Africa (UBA) were 32 per cent apiece.  For First Bank of Nigeria Plc and Ecobank Plc, it was 35 per cent.

The report added: “The continuous hikes in MPR have tightened financial conditions for the productive sector, with the average maximum lending rate charged by commercial banks on manufacturers’ finances rising to 35 per cent in Q2 2024 from 28.6 per cent in Q1 2024.”

 Analysts have predicted that the maximum lending rate would increase further as the MPC of the CBN hike rate to 26.75per cent at the late meeting in June 2024.

The average maximum lending rate had closed 2023 at 26.62per cent on the backdrop of CBN hike in MPR to 18.75per cent.

The unanticipated rise in MPR has impacted on the banking sector lending rate as the CBN sustained pressure in tackling inflationary pressure.

This unprecedented move has not only set the MPR at its highest level to date but also reflects the CBN’s determined effort to address the persistent pressure on foreign exchange and inflation.

The decision has garnered praise from the International Monetary Fund (IMF), which commended the MPC’s resolve to tighten monetary policy further by increasing the policy rate to 26.75 per cent.

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

The recent announcement, made by CBN Governor, Dr. Yemi Cardoso, had highlighted the central bank’s proactive approach towards monetary tightening amidst challenging economic conditions.

The rate hike will slow economic growth and reduce consumer spending, according to analysts at FBN Quest.

“Ultimately, the impact on the general economy could be a potential slowdown in economic growth, with consumer spending suppressed, and a decrease in business investments,” FBN Quest said in a recent note.

The report also showed that the average prime lending rate rose to 15.85 per cent in June 2024 as against 13.85 per cent in June 2023.

The money market data by CBN showed that the average prime lending rate hit the highest peak since amid uptick in Monetary Policy Rate (MPR).

Fitch Ratings projected that the CBN maintained stand on continues tightening policy in the near term, which seems necessary to more fully control inflation as rapid credit and money-supply growth suggests a still-loose monetary context.

“Such a tightening will still face implementation challenges, partly due to the potential for countervailing political pressure. However, without further sizeable monetary tightening, it may be difficult to achieve macroeconomic stability – real interest rates remain negative, deterring inward portfolio investment,” Fitch Ratings added.

Investment Banker & Stockbroker, Mr.  Tajudeen Olayinka stated that banks review their lending rates on regular basis, subject to their respective cost of funds and the direction of MPR, not necessarily using MPR as a distinct value.

According to him, the MPR signals to them the direction of interest rate in the market and the price they will pay if they have to borrow from or lend to CBN.

“Therefore, their deposit mix, which includes idle customers’ deposits, determines what their weighted average cost of funds would be. They then factor in the signal from MPR, to enable them arrive at their various prime lending rates which are usually reserved for their prime customers.

“But with all these recent circulars from CBN concerning idle deposits and foreign exchange windfalls, the market should prepare for a prolonged high interest rate regime. CBN doesn’t seem to have a good understanding of its recent destructive policies,” he added.