Banks’ cheap funds don’t reflect in loans to customers
Nigerian banks access low-cost funds from individual/corporate deposits, interventions from the Central Bank of Nigeria (CBN) and development finance institutions but lend same to customers at higher rate.
Nigeria’s 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, according to applicable rates for each of the DMBs as of May 14, 2021, published on the CBN’s website.
A publication by the CBN, themed ‘Bullion,’ noted that 2019 started with the industry weighted average prime lending rate (PLR) and maximum lending rate (MLR) as high as 16.01 percent 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 and climaxed 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.
Responding to the development, Ayodeji Ebo, head, retail investment, Chapel Hill Denham, says the main reason lending rate will be high is because of rates in the interbank and financial markets.
“Rates are in double digits, hence no incentive to create risk assets that come with various risks. To take the risk, then must come with a premium,” Ebo states.
The Overnight (O/N) inter-bank rate, which is the rate at which DMBs borrow and lend to one another, increased by 2.17 percent to close at 14.83 percent on Wednesday as against the last close of 12.66 percent on Tuesday.
Also, the Open Buy Back (OBB) rate, the money market instrument used to raise short-term capital, increased by 2.33 percent to close at 14.33 percent from 12 percent on the previous day.
In 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 N20.37 trillion as of Q4 2020. Oil & Gas and Manufacturing sectors got credit allocation of N3.93 trillion and N3.19 trillion 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 CBN.