Banking Industry Maximum Lending Rate Hits Record High of 31.06%

Kayode Tokede

Following the latest hike its Monetary Policy Rate (MPR) by the Central Bank of Nigeria (CBN), the average maximum lending rate in the banking industry increased to 31.06 per cent in November 2024, setting another record high since 2019 when it was at 31.43per cent. 

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

The CBN has increased the MPR six times this year, with the primary objective to address key economic challenges such as double-digit inflation, foreign exchange stability, and financial system stability.

When inflation is high (currently at 34.60 per cent as of November 2024), the CBN raises the MPR to make borrowing more expensive and saving more attractive.

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.

Money market indicators data released by the CBN revealed that average maximum lending rate increased to 31.06 per cent in November 2024 from 30.28 per cent in October 2024 when Monetary Policy Committee (MPC) members of CBN voted to increase MPR to 27.50 per cent from 27.25 per cent.  

Early in the year, the money market indicators of CBN showed a  27.07 per cent average maximum lending rate in January 2024 when MPR was at 18.75 per cent, while in March 2024, it closed at 29.38 per cent as MPR stood at 24.75 per cent in March 2024.

When the MPR was increased from 26.75 per cent in August 2024 to 27.25 per cent, the average maximum lending rate also rise from 29.93 per cent in August 2024 to 30.21 per cent in September 2024.

In Nigeria, the maximum lending rate—the upper limit banks charge on loans, especially for higher-risk customers—has been volatile.

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 13.5per cent

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 the first quarter (Q1) of 2024.

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

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 predicted further increase in the average maximum lending rate amid an unstable foreign exchange market and double-digit inflation rate.

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 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.

In a chat with THISDAY, the Vice President, HighcapSecurities, Mr. David Adnori explained that commercial 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.

He expressed that 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 to 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,” Adnori added.

On the MPC outlook for 2025, analysts at Cordros Research in a report titled, ‘Nigeria in 2025. Reform to Recovery: Navigating the Rebound,” said, “As we have stated in our domestic macros report, we think the MPC is set to pause its rate-hiking cycle as inflation begins to moderate in 2025, owing to the high statistical base effect and reduced naira volatility. 

“Furthermore, the anticipated reduction in interest rates in the advanced economies will reduce the pressure on the MPC to raise interest rates further. However, the still elevated inflation risks will likely induce the MPC to hold the policy rate steady for a longer period to consolidate gains of previous rate hikes while achieving a lower negative real rate of return. 

“Also, GDP growth is poised to remain resilient, which diminishes pressure on the CBN to lower rates prematurely. All told, we anticipate that the MPC will likely keep the policy rate unchanged for most of 2025E after a 25bps hike at the January meeting, with a 50basis points rate cut projected for MPC’s November meeting.”