Banks move to woo savers with new interest rate

There are indications that more banks have moved to increase their savings rates to woo customers, though the increase in the rate seems insignificant, it may be a competitive factor.

This followed the recent hike in the Central Bank’s benchmark interest rate known as the MPR by 150 basis points to 13 percent, for the first time in six years.

Deposit money banks are expected to increase their customers’ deposit rate to a minimum of 10 percent of the monetary policy rate.

In recent weeks, outflows from the banking system such as the Cash Reserve Requirement (CRR), Open Market Operations (OMO), Treasury Bills (T-bill) and Federal Government of Nigeria (FGN) bond auction debits have outweighed inflows.

Inflows come from sources such as Federation Account allocations to states and local governments, T-bill and OMO maturities, and FGN bond coupons, according to a report by Coronation Research.

Consequently, the immediate reaction of the banks in the last two weeks was to raise their deposit rates. They also sold off short-term liquid instruments such as the Central Bank of Nigeria (CBN) Special Bills and short-dated T-bills, leading to the rapid increase in yields.

However, some Nigerian banks are said to be waiting for their regulator – the Central Bank to issue a directive to them to increase their deposit rate, more than a month after a hike in Monetary Policy rate (MPR), BusinessDay findings show.

Read also: Infinity Trust Mortgage Bank hits highest profit in eight years

What banks are doing now is increasing the cost of borrowing. Deposit may follow suit if customers demand a higher rate. For now emphasis is on raising the borrowing rate. Competition will drive an increase in deposit rate. But now risk assets are being driven by the CBN regulatory position. Because MPR has gone up, banks have to increase their rates, because what CBN increased is the rate of borrowing from the CBN. If the CBN does not tell banks to increase it, competition will,” a top banker told BusinessDay.

In September 2020, the CBN issued a circular to all banks directing that the minimum interest rate on savings deposits be reduced to a minimum of 10 percent of monetary policy rate or 1.25 percent, from the previous minimum of 30 percent of MPR, or 3.75 percent.

This circular came after Africa’s largest economy’s biggest bank reduced the monetary policy stance to 11.5 percent in September 2020 from 12.5 percent.

The letter to all banks signed by Bello Hassan, director, banking supervision in September 1, 2020, reads, “in line with recent market developments, the Bank has reviewed the minimum interest payable on savings deposits in its guide to charges by banks, other financial and non-bank financial institutions issued in December 2019.”

BusinessDay’s findings show that only two banks have reviewed their interest rates payable on customers’ deposits.

“Competition can drive deposit rates higher but I don’t see it driving the current deposit rate higher under the current situation in Nigeria,” said another top banker.

He noted that the business environment is tough, leading to compression of margins for all business concerns, and thus banks will maintain lower rates on deposit rates as possible within regulatory approvals.

“Increase in savings rate will help to encourage deposit, and will increase the amount of funds that is available for lending to the real sector,” he said.

“The Increase in savings rate was brought about as a result of the increase in the Monetary Policy Rate (MPR) from 11.5 percent to 13 percent. Recall that the saving rate that banks charge to customers is tied to the MPR,” the banker added.

On his part, Muda Yusuf, chief executive officer of The Centre for the Promotion of Private Enterprise (CPPE), said competition can drive the increase in deposits rate.

“Banks are always very quick to increase lending rates but very slow in savings rate. What makes the difference is competition.

He noted that there is liquidity in the banking system and that has created an opportunity for banks to offer lower interest rates on deposits.

According to him, with the competition from FinTechs and microfinance space, banks would be forced to adjust their savings rates. “It is market determined, I do not think it is regulatory,” he said.

Fidelity Bank increased its deposit rate to 1.3 percent per annum from 1.15 percent previously. United Bank for Africa has updated its savings rate offering on its website. The bank offers 2.75 percent interest rate for savings ranging from N50,000 to N90,999, and 3.5 percent for N250 million.