Following the Central Bank of Nigeria’s (CBN) consistent hike in its Monetary Policy Rate (MPR), the banking sector’s maximum lending rate increased to 29.49% in April, up from 29.38 percent in March 2024, the highest point since 2020.
A financial expert, in an exclusive interview with Techeconomy’s correspondent, has identified key areas where the high bank lending rate will impact the economy, while also proposing corresponding solutions.
Segun Aremu, of Peculiar Innovative Consulting, observed that the escalating bank lending rate would affect key aspects of Nigeria’s economy in areas such as the real sector. It will also diminish bank risk assets, while exacerbating unemployment and contributing to inflation.
“The implications for the Nigerian economy can be seen in four ways; it will reduce real sector economic growth, meaning that fewer businesses and companies will seek funding from banks,” Aremu said.
He explained that banks serve as conduits for setting up or boosting organizations through loans and capital. High costs would discourage entities from seeking funds, leading to a downturn in real sector activities.
Aremu further elaborated, “The banking rate is the rate at which banks lend to their customers. As this rate increases, the cost of funds for borrowers also rises. The function of the bank is essentially financial intermediation, channeling funds from the surplus side of the economy to the deficit side.”
The deficit side refers to those who need money for business operations, such as purchasing machinery or increasing capital. The surplus side comprises individuals with excess funds who wish to save.
“When the average maximum lending rate was 29.38 percent, credit to the real sector declined, resulting in weakened business activities,” Aremu recalled.
The maximum lending rate is the rate at which commercial banks lend to customers with lower credit ratings. Data from the apex bank’s money market indicator showed that the average maximum lending rate began in January 2024 at 27.07 percent when the MPR was 18.75 percent, and fell to 26.55 percent in February 2024 after the CBN’s monetary policy committee raised the MPR to 22.75 percent.
In March and April 2024, the banking sector’s average maximum lending rate stood at 29.38 percent and 29.49 percent, respectively, amid an MPR of 24.75 percent.
Aremu noted that the high banking lending rate would reduce Nigeria’s Bank Risk Asset, meaning fewer people would take out loans and advances.
“Analysts have predicted a further increase in the maximum lending rate due to the hike to 26.25 percent by the Monetary Policy Committee (MPC) of the CBN at the May 2024 meeting,” he added.
The average maximum lending rate closed at 26.62 percent in 2023, following the CBN’s increase in MPR to 18.75 percent. The unexpected rise in MPR, attributed by the CBN to efforts to curb inflation and alleviate pressure on foreign exchange, has influenced the banking sector’s lending rates.
Despite the challenges posed to the Nigerian business community, the International Monetary Fund (IMF) has commended the MPC’s decision to tighten monetary policy further by increasing the policy rate to 26.25%.
Aremu also mentioned that the high rate tends to fuel inflation, as some companies will pass on the increased costs of funds to consumers.
“If the cost of funding is too high, companies will look to cut internal costs, which may include reducing employment,” he said.
However, Aremu expressed optimism that the government could still implement several initiatives and incentives, such as tax reductions and rebates for organizations.
He suggested that the government could also empower other sectors of the economy, such as power and agriculture, which would have a ripple effect on the economy.
Comments 1