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How bank lending rates are trending downwards

The banking industry lending rates have been on a downward trend since 2017 as seen in the economic report of the Central Bank of Nigeria (CBN).

Prime lending rate for instance, declined by 2.67 percentage point to 14.99 percent in the fourth quarter of 2019 compared with 17.60 percent in the fourth quarter of 2017.

It stood at 16.45 percent in the fourth quarter of 2018, declining by 1.46 percentage point over the Q4 2019 numbers.

A prime lending rate is the interest rate that commercial banks charge their most creditworthy customers.

The maximum lending rate, which is the rate at which banks extend credit to perceived risky customers, fell by 1.32 percentage point to 29.98 prcent at the end of fourth quarter of 2019 as against 31.30 percent in Q4 2017. The rate, which stood at 30.60 percent in the fourth quarter of 2018, declined by 0.62 percentage points when compared with the Q4 2019 numbers.

Credit conditions in the banking system have improved supported by the CBN’s new policy measures announced in June 2019, which requires banks to maintain a minimum 65 percent loan to deposit ratio.

The Monetary Policy Committee (MPC), at its November 2019 meeting said it was hopeful that the Loan to Deposit Ratio (LDR) initiative must be sustained as interest rates being paid by borrowers have so far dropped by up to 400 basis points between June and October 2019. These have happened with corresponding decline in Non-Performing Loans (NPLs) to 6.5 per cent at the end of October 2019.

“These measures have placed our banks in a much better position towards supporting a stronger economic recovery,” Godwin Emefiele, governor of CBN said in December 2019.

Consequently, the spread between the weighted average term deposit and maximum lending rates narrowed by 0.91 percentage point to 21.91 percentage points at the end of fourth quarter 2019. Similarly, the margin between the average savings and maximum lending rates narrowed by 1.44 percentage point to 26.05 percentage points at the end of December 2019.

At the inter-bank segment, the weighted average inter-bank call rate, which stood at 8.80 per cent at end-September 2019, fell significantly by 5.4 percentage points to 3.40 per cent at end-December 2019. Similarly, the Nigeria inter-bank offered rate (NIBOR), for the 30-day tenor, fell from 12.60 per cent in the preceding quarter to 12.31 per cent at end-December 2019.

Also, the weighted average rate at the Open-Buy-Back (OBB) segment fell significantly by 4.5 percentage points to 5.77 percent.

Interest rates moved in tandem with the level of banking system liquidity during the fourth quarter of 2019 with developments in banks’ deposit rates mixed.

At its meeting last month, the Monetary Policy Committee noted that gross credit in the industry grew by N2 trillion between May 2019 and December 2019; channelled primarily to the employment-stimulating sectors such as agriculture and manufacturing, in addition to increased lending to the retail and Small and Medium Enterprises (SME) segments, which is expected to help boost domestic output growth in the short to medium term.

To retain the gains from credit expansion and current industry focus on lending, the committee advised the Bank to sustain its LDR policy and in addition continue to deploy its Differentiated Cash Reserves Requirement (DCRR) policy which directs new funding for greenfield projects and expansion to critical sectors of the economy.

The CBN at the last MPC meeting in January retained the Monetary Policy Rate (MPR) at 13.5 percent, citing comfort with its policies so far and the need to yet again, allow time to understand growth trend for the year.

In consideration of rising inflation and surging liquidity, the CBN last month raised the Cash Reserve Ratio (CRR) by 500 basis points to 27.5 percent from 22.5 percent since 2016.

 

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