7 September 2012

Nigeria: 'Multinationals Shun Nigerian Banks Over High Interest Rates'

Multinational companies operating in Nigeria now seek funds from their parent companies to fund their operations locally as a way of avoiding the high interest rate regime in the country, a report has shown.

This, according to a report by FSDH Securities Limited is one of the strategies the multinationals have adopted to reduce financing cost.

The FSDH report titled: "Cadbury Nigeria Plc-Set for Additional Growth," was obtained by THISDAY Thursday.

Data made available by the Financial Market Dealers Association (FMDA) showed that while interest rate on structured loans stood at 22.16 per cent, prime rate was 17.92 per cent.

The Central Bank of Nigeria (CBN) had adopted a tight monetary policy stance at its July monetary policy committee (MPC) meeting where it raised the Cash Reserve Ratio to 12 per cent, from eight per cent.

But the 25-page FSDH report pointed out that other critical sectors of the economy such as wholesale and retail trade, manufacturing, construction and real estate that used to access funds at market rates are finding it difficult to survive.

"On average, wholesale and retail trade is the second largest sector of the Nigerian economy and thus developments in this crucial sector affect other macroeconomic variables in Nigeria. The CBN has over time justified the persistent increase in the anchor interest rate 2011 in order to bring down inflation rate to its target of single digit.

"It also argued for a regime of maintaining a real positive return on fixed income securities in Nigeria so as to attract foreign investors to the domestic market to supply foreign exchange," it added.

It insisted that raising interest rate to maintain stability in the forex market has not been effective in Nigeria because of the high import dependent and mono-export nature of the Nigerian economy.

It added: "Recent evidence shows that the attractive yields on marketable securities in Nigeria have not been able to attract the needed foreign funds to bring about the desired stability and appreciation in the value of the naira."

Inflation rate stood at 12.8 per cent as at July 2012, higher than the single digit target of the CBN.

The research and investment had released a Gross Domestic Product (GDP) growth rate forecast of between 6.5 per cent and seven per cent for 2012.

The report further said: "We appreciate the fact that some of the factors causing the declining GDP growth rate may not be addressed by pure monetary policy tools, but a relaxed monetary policy stance may improve the situation to prevent Nigeria from joining the league of countries already in recession.

"The cause of the current inflation rate can be linked to the shortage in production of basic needs, security challenges in the country, pass through effect of prices of commodities in the international market, high finance charge for manufacturing industries, and the effects of the partial removal of fuel subsidy."

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