Nigerian banks lend to customers at higher rate despite cheap funds

Nigerian banks access low cost funds from individual/corporate deposits, interventions from the Central Bank and development finance institutions but lend same to customers at higher rate.

Deposit Money Banks (DMBs) pay customers an average interest rate of 1.15 percent for saving with them but lend to customers at an average rate of 18 percent for prime lending and average rate of 30 percent for maximum lending, applicable rates for each of the DMBs as at May 14, 2021, published on Central Bank’s website revealed.

A publication by the Central Bank of Nigeria (CBN), themed ‘Bullion’ noted that year 2019 started with the industry weighted average prime lending rate (PLR) and maximum lending rate (MLR) as high as 16.01 and 30.48 percent, respectively.

Average saving rate for the industry during the period was 4.07 percent. By the end of April 2019, the PLR and the MLR spiked to the period climax at 18.23 and 30.89 percent.

Astonishingly, the average saving rate fell to 3.91 percent, according to a study titled, ‘An Appraisal of CBN Temporary Credit Initiatives: An exploratory Analysis’, written by Baba Yaaba.

This implies that while the cost of funds to banks was declining, lending rate was on the rise. This disparity was a clear signal of exploitation by the banks which is no doubt unfriendly to growth, the publication stated.

On July 2019, the CBN increased the Loan to Deposit Ratio (LDR) to 60 percent, which led to private sector credit expansion by 3.46 percent to 2.11 percent at the end of July 2019 from -1.36 percent in June.

The trend continued until it climaxed at 13.57 percent at the end of the year. Arising from the adjustment in the Cash Reserve Ratio (CRR) to 27.5 percent in January 2020 however, the private sector credit moderated to 12.57 percent.

As of fourth quarter of 2020, banks credit to the private sector rose by 2.56 percent to N20.37 trillion, the year that was bedevilled by the impact of Covid-19 pandemic.

The National Bureau of Statistics (NBS) banking sector report released on April 2021, showed that total value of credit allocated by the bank stood at N20.37trn as of Q4 2020. Oil & Gas and Manufacturing sectors got credit allocation of N3.93trn and N3.19trn to record the highest credit allocation as at the period under review.

The reason for growth in banks’ loan book was as a result of the implementation of the Loan to Deposit Ratio (LDR) policy of the Central Bank.