Market News

BY  Kayode Tokede

Following the consistent Monetary Policy Rate (MPR) hike by the Central Bank of Nigeria (CBN), banking sector maximum lending rate moved from 29.38 per cent in March 2024 to 29.49 per cent in April 2024, the highest since 2020.

With the average maximum lending rate at 29.38 per cent, bank customers are expected to witness hike on lending to real sectors, a factor contributing to weak business activities.

Maximum lending rate refers to the rate charged by commercial banks for lending to customers with low credit rating.

According to the CBN’s money market indicator, the average maximum lending rate opened January 2024 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 Apriil 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.

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

Analysts have predicted that the maximum lending rate would increase further as the Monetary Policy Committee (MPC) of the CBN hiked rate to 26.25 per cent at its last meeting in May 2024.  

 The average maximum lending rate had closed 2023 at 26.62 per cent on the backdrop of CBN hike in MPR to 18.75 per 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 26.25 per cent.

Such a strategic manoeuvre aims to curb the inflation surge, which recorded a year-on-year peak of 33.69 per cent in April 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.

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

Lending rates obtainable from the CBN’s website revealed that Ecobank has one of the highest average maximum lending rate in the “General sector”, followed by Stanbic IBTC.

As of May 17, 2024, FCMB average maximum lending rate for the General sector stood at 60 per cent, while Stanbic IBTC reported 50.00 per cent.

In Nigeria, large corporations perceived as having lesser risk with a history of generating consistent cash flows are offered prime lending rates, while small businesses and individuals perceived as having higher risk typically fall above the prime lending rate margin.

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.

Commenting, the Chief Executive Officer of the Centre for Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, stressed that the hike in MPR would mean a higher cost of credit to the real sector.

He said, “The new dramatic increase in MPR means that the cost of credit to the few private sectors that have exposure to bank credits will increase, which will impact their operating costs, prices of their products and profit margins, amidst very challenging operating conditions.”

He noted that in the Nigerian context, price levels are not interest sensitive, stressing that supply side issues are much more profound drivers of inflation.

According to him, the hike would further pose a risk to the financial intermediation role of financial institutions in the country.

“The increase would constrain the capacity of banks to support economic growth and investment, especially in the real sector of the economy because the increases are quite significant.

“Already, bank lending has been constrained by the high CRR, with many operators in the sector claiming that effective CRR is as high as 50 per cent for many banks. The Nigerian banks are yet to live up to their financial intermediation role because of these constraining factors,” he concluded.

On his part, Investment Banker & Stockbroker, Tajudeen Olayinka in a chat with THISDAY stated that, the current high interest rate regime in Nigeria is the outcome of a deliberate policy of the central bank to encourage foreign inflows into Nigeria from foreign portfolio investors, in a way to increase accretion to foreign reserves and stabilize exchange rate of the Naira.

He explained further that, “This is the reason for rising interest rate in the economy, with continued repricing of securities across markets and instruments, including loans and advances by banks. So, high interest rate regime will remain with us for as long as it takes CBN to achieve its exchange rate and inflation objectives.”

In tackling it, he said, “I think its sustainability will guide CBN’s decision, going forward. For me, the huge debt service cost to the government and its further threat to inflationary pressure are clear indications that the policy may not be sustainable.”

An Economist and Investment Specialist, Dr. Vincent Nwani stated that the MPR hike among others depicts an extraordinary stress to businesses in the country across all sectors and the implication of this on the sustainability and competitiveness of the business is telling on the immediate and on the long term.

He said, “Businesses are increasingly scaling down, cutting back employment and adapting all sorts of lean measures to navigate the rough dispensation and how long they will cope remains to be seen.”

Nwani on way forward, said “On the immediate, the palliative measures for businesses earlier announced by the president should be implemented. In addition, we look to see some fiscal complementary and business friendly measures.

“For instance, regulatory related charges and fees should be reviewed, streamlined, and reduced in a bid to reduce financial burden on busine

sues.”