Higher interest rates signal end to cheap consumer loans

It was a Saturday morning when Olarika Abioye (not real name) got an unexpected message from her bank, Guaranty Trust Bank (GTBank). The message informed her of an upward review on the interest rate on personal loans.

“Due to money market conditions, the interest rate on your current loan facility has been reviewed to 21 percent per annum,” the message seen by BusinessDay read.

Before now, the interest rate on personal loans from GTBank, one of Nigeria’s largest lenders, was 19 percent.

Nigerian banks are reviewing interest on loans following the hike in rates of money market instruments, including treasury bills and OMO bills.

This increase may mark the beginning of an end to the era of cheap funds for consumers who were lured in the past two years to take cheaper bank loans that fintechs offered.

Abioye, who works at a manufacturing company in Lagos, had reached out to her bank for a N1,000,000 loan at 19 percent per annum interest rate to inject into her small business, which suffered the biggest loss yet from the economic impact of the COVID-19 pandemic.

At 19 percent interest, which comes to nearly N100,000 a month, Abioye struggles to meet up, often dipping her hands into her personal savings due to slow demand. With the new rate hike, she would need an additional amount to service the loan monthly.

“Sales are slow this period and that has pushed up my stock of inventory. I am concerned about how to service my debt only for my bank to say they have increased interest on the loan,” she said.

But that is for Abioye who got a smaller amount of loan. The situation is worse for those who got higher loans, say N10 million and above, as it would mean the loans would be priced at a higher interest as opposed to when they were collected at lower interest.

GTBank did not immediately respond to calls and an email seeking comment.

For months, Nigeria’s monetary authorities kept money rates low but with inflation galloping at a fast pace and an early exit from economic contraction, the era of cheap money in Africa’s largest economy could be about to end, economists say.

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GTBank’s 2 percent increase in the cost of personal loans is the clearest sign yet that even top lenders are gearing to move rates at a time Nigeria is hoping to truly embed the culture of consumer banking into its arsenal for growing wealth and boosting consumer spending for a traumatised population.

Nigeria’s annual inflation rate climbed for a 17th straight month to 16.47 percent in January of 2021. It was the highest inflation rate since April of 2017, as food inflation hit an over 12-year high of 20.57 percent linked to pandemic disruptions and dollar shortages as well as lingering restrictions on imports of certain food items, despite the re-opening of the country’s borders.

The CEO of Financial Derivatives, Bismarck Rewane, has for months said the cost of borrowing would have to go north, hinging his forecast primarily on the back of Nigeria’s precariously high rate of inflation.

According to the economist, “Nigeria is already in a liquidity trap. The CBN will have no choice but to raise interest rates as it prioritises price stability over economic recovery.

“The timing of an interest rate increase will be a function of money supply growth, Federal Government’s overdraft, galloping inflation and exchange rate pressures.”

Last week, Boingotlo Gasealahwe, a Bloomberg economist, while commenting on Nigeria’s exit from recession, which he said defied expectations, said, “We see the positive 4Q GDP print as paving the way for the CBN to resume rate hikes in order to curb the country’s rising inflation rate.”

The central bank had left its monetary policy rate unchanged at 11.5 percent during its January 2021 meeting, as the policymakers were again confronted with a policy dilemma as to whether to aggressively combat the inflationary pressure or support measures currently aimed at stimulating growth and reversing the recession.

Although the economy was then still faced with high inflation and low economic growth, the Monetary Policy Committee (MPC) resolved to reverse both developments and continue pursuing price stability while stimulating growth.

At its September 2020 meeting, the CBN unexpectedly slashed its monetary policy rate by 100bps to 11.5 percent, bringing borrowing costs to the lowest since 2016, and it was the second rate cut of 2020 aimed at supporting the economy that plunged 6.1 percent in the Q2 hit by the global pandemic.

In Nigeria, the Consumer Price Index (CPI) measures the change over time in the prices of 740 goods and services consumed by people for day-to-day living. The index weights are based on expenditures of both urban and rural households in the 36 states.

The CBN is already signalling a possible rate hike given the trend of rising interest rate levels in the country after nearly two years of record-low rates.

Yields on one-year government risk-free treasury bills climbed to 4 percent, rising from as low as zero percent last year. Similarly, rates on CBN OMO bills hit double digits of 10.1 percent in the last auction, February, compared to the 5.74 percent a month ago.

This is forcing banks, many of which invest in these securities, to review rates on borrowed funds, which could have hitherto been invested in these instruments at zero risks.

“The banks are charging more to compensate for the opportunity cost of lending these funds to customers in an uncertain and high-risk terrain as opposed to taking positions in these instruments,” a Lagos-based analyst told BusinessDay.

Last year, interest-rates on most assets crashed to lower lows, caused by excess liquidity in the system after the central bank in a conscious move, restricted non-bank institutional investors from investing in OMO bills.

On two occasions last year, the CBN cut benchmark interest rates to 11.5 percent, bringing borrowing costs to the lowest since 2016 and supporting the economy that plunged by more than 6 percent after being hammered by the disastrous impact of the pandemic.