No Respite for Businesses as Banking Sector Maximum Lending Rate Reached 30.21% in September

Kayode Tokede

The tough operating business climate in Nigeria went a notch further in September as average maximum lending rate in the banking sector increased to 30.21per cent, which is another record high. 

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

THISDAY analysis of the Central Bank of Nigeria’s (CBN) ‘Money market indicators’, revealed a correlation between hike in Monetary Policy Rate (MPR) and increase in average maximum lending rate.

As the average maximum lending rate closed September 2024 at 30.21 per cent from 29.93 per cent in August 2024, MPR moved from 26.75 per cent in August 2024 to 27.25 per cent in September 2024. 

Average maximum lending rate in Nigeria averaged 14.07 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.

Analysts had predicted that the maximum lending rate would increase further as the Monetary Policy Committee (MPC) of the CBN hiked rate to 26.75per cent at the late meeting in June 2024.

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

The CBN’s MPC decision to hike the MPR to 27.25 per cent likely reflects an attempt to control inflation and stabilise the naira.

The CBN, under Mr. Yemi Cardoso has increased the MPR for the fifth time to combat inflation and foster economic stability.

Such a strategic manoeuvre aims to curb the inflation surge, which recorded a year-on-year peak of 32.7per cent in September 2024 and to mitigate the depreciative pressures on the naira.

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.

The first hike increased the rate from 18.75 per cent to 22.75 per cent, the second to 24.75 per cent, the third to 26.25 per cent, the fourth to 26.75 per cent and recently 27.25 per cent in the September 2024 Monetary Policy Committee (MPC) meeting.

The increases, totalling 850 basis points since Cardoso’s appointment, have been driven by efforts to tackle the country’s persistent inflation challenges, which include high core and food inflation.

THISDAY checks showed that average maximum lending rate opened 2024 at 27.07 per cent and it has increased by 314 basis points to 30.21   per cent reported by the CBN in the month under review.  

Fitch Ratings had projected that the CBN would 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 added.

Speaking with THISDAY, Investment Banker & Stockbroker, Mr. Tajudeen Olayinka, said banks reviewed 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,” Olayinka further said.

On his part, the Chief Research Officer, InvestData Consulting Limited, Mr. Omordion Ambrose, said: “Businesses need a lot of credit facilities to survive, but in an environment where the lending rate is astronomical, many enterprises, especially small and medium-scale, might find it extremely difficult to survive as their products will remain uncompetitive and the cost of production and the sale prices to consumers will remain high.”

He added: “A hike in interest rate is often considered a manufacturers’ nightmare as it stifles productivity and expansion.

“A hike in interest rate slows down productivity, as manufacturers struggle to keep machinery in operations and pay salaries. Those who look forward to borrowing for expansion and production will have to shelve such ideas in the face of the high cost of accessing funds.”

In addressing the challenges, Vice president, Highcap Securities Limited, Mr. David Adnori, said development banks must be encouraged to lend at a single digit with stringent tracking, adding that CBN’s policy on tackling inflation rate is not working.

However, the Nigeria’s banking sector average prime lending rate rose to 16.75 per cent in September 2024 a decline from 17.01 per cent reported in August 2024. 

The prime lending rate indicates the possible rate offered to the most creditworthy customers by Nigerian banks.