No respite for banks customers in Nigeria as the sector's average maximum lending rate increased to 30.28 per cent as of October 2024, a record since February 2022 when it was at 30.73 per cent.
Maximum lending rates refers to the average of the highest lending rates charged by deposit money banks in Nigeria.
Trend analysis showed that increase in the average maximum lending rate is in pattern with hike in Monetary Policy Rate (MPR).
The Central Bank of Nigeria (CBN) increase MPR primarily to address key economic challenges such as double-digit inflation, foreign exchange stability, and financial system stability.
When inflation is high (currently at 33.88 per cent as of October 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.
The CBN "money market indicators" revealed that average maximum lending rate increased to 30.28 per cent in October 2024 from 30.21 per cent in September 2024 when Monetary Policy Committee (MPC) members of CBN voted to increase MPR to 27.25 per cent from 26.75 per cent.
Early in the year, the money market indicators of CBN revealed 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.
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
Updates as of October 2024 showed average maximum lending rate for "General" lending as high as 48 per cent and low of 10.70 per cent.
For example, Ecobank, and Signature Bank had average maximum lending rate of 48 per cent as of October 25, 2024, followed by FCMB Bank with 45 per cent average maximum lending rate to general lending rate.
Nova Bank has one of the lowest average maximum lending rate of about 10.70 per cent as of October 25, 2024, followed by Standard Chartered Bank with 28 per cent and Guaranty Trust Bank Limited at 29 per cent average maximum lending rate, respectively.
Other top banks average lending rate as of October 25, 2024 showed that Zenith Bank Plc, 38.50 per cent; Access Bank, 35.00 per cent; United Bank for Africa Plc (UBA), 32 per cent and FBN Limited, 36.00 per 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."
Meanwhile, analysts have 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 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 27.25 per cent.
A recent announcement by the CBN Governor, Dr. Yemi Cardoso 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.
The report also showed that the average prime lending rate rose to 15.85 per cent in June 2024 as against 13.85 per cent in June 2023.
Fitch Ratings projected that the CBN maintained stand on continues tightening policy in the near term, which seems necessary to more fully control inflation as rapid credit and money-supply growth suggests a still-loose monetary context.
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"Such a tightening will still face implementation challenges, partly due to the potential for countervailing political pressure. However, without further sizeable monetary tightening, it may be difficult to achieve macroeconomic stability - real interest rates remain negative, deterring inward portfolio investment," Fitch Ratings added.
In a chat with THISDAY, Vice President, Highcap Securities Limited, 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.
