For Ahmed, an Okada rider, the dream of attaining financial stability or transitioning into a new business feels increasingly out of reach.
The Central Bank of Nigeria’s recent decision to raise the interest rate to a record high has directly impacted the ability of everyday Nigerians to access loans and launch businesses.
Nigeria’s current interest rate stands at 24.75%, far higher than the interest rate in America, which ranges between 5.25 and 5.50%. This contrast has resulted in increased borrowing costs and made securing loans more difficult and expensive.
However, the hike is a response to the nation’s rising inflation, which hit a 28-year high of 33.69% in April 2024. Inflation had soared due to factors like oil subsidy removal and naira devaluation, but Rewane says “There’s a limit to how much interest rate can be used to control inflation”.
On March 26th, 2024, the Central Bank raised its key monetary policy rate by 200 basis points (bps) to a record high of 24.75%. This move followed a previous increase of 400 bps, marking the largest rise in borrowing costs in 17 years.
The Impact on Entrepreneurs
Three years ago, Ahmed saw hope in asset financing options for purchasing motorcycles. These “buy now, pay later” plans seemed like a convenient solution.
Unfortunately, the reality was not what he had hoped for. The financing companies charged exorbitant interest rates, often tripling the actual cost of the motorcycle.
Last year, motorcycles like his cost between ₦350,000 and ₦450,000. Today, those same bikes have skyrocketed to around ₦1 million due to inflation and a weakened naira.
So imagine how much triple interest swept riders off their feet.
This predatory practice trapped many of them in debt. Some even lost their motorcycles before completing payments, and the psychological burden led to severe stress and even suicide among struggling riders.
Ahmed’s story is not unique; many African entrepreneurs face similar challenges. Borrowing has become way too expensive and they struggle to secure the capital needed to invest in their businesses.
With formal loans out of reach due to high interest rates, entrepreneurs are forced to seek alternatives, including informal lenders like family and friends. While these alternatives provide temporary relief, they can strain personal relationships.
Small and medium-sized enterprises (SMEs) are particularly vulnerable, as they often rely on short-term loans for working capital.
Interest Rate and Investment Decisions
Interest rates influence investment decisions. When rates are low, businesses are more likely to invest in expansion, new equipment, and hiring. Conversely, high rates discourage investment, leading to slower economic growth. As a business owner, understanding these dynamics is important for making informed decisions.
Central Bank Policies and Interest Rate
1. Monetary Policy Rate (MPR)
The Central Bank of Nigeria (CBN) sets the Monetary Policy Rate (MPR), which serves as the benchmark interest rate.
The MPR is the interest rate at which the central bank lends money to commercial banks. It serves as the benchmark rate for the entire financial system.
When the central bank adjusts the MPR, it directly affects commercial banks’ lending rates. If the MPR increases, borrowing costs rise for businesses and individuals seeking loans. Conversely, a decrease in the MPR can lead to lower borrowing costs.
Higher interest rates may discourage borrowing for investment or expansion, while lower rates can stimulate economic activity.
2. Inflation Targeting
The CBN uses interest rates to manage inflation. If inflation is high, the central bank may raise rates to curb spending and reduce price pressures.
Higher interest rates discourage consumer spending and borrowing. When loans become more expensive, people tend to spend less, which can help control inflation.
Nonetheless, there’s a delicate balance. While curbing inflation is essential, excessively high interest rates can hinder economic growth. The central bank must strike a balance between price stability and supporting economic activity.
Managing inflation through interest rates isn’t straightforward. External factors such as global oil prices and structural issues like supply chain disruptions also impact inflation.
So, to scale up, it’s important to understand the nooks and crannies of how business works in relation to government policies.
[The name, “Ahmed” is not the real name]
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