The cost of lending in Nigeria has picked up from where it left off last year as interest rates continue to crash, in what is a boon for borrowers.
Nigeria’s biggest publicly listed bank, Guaranty Trust Bank, sent out emails Tuesday, Jan.14, saying rates on its Quick Credit product has been reviewed downwards to 1.33 percent monthly from 1.75 percent.
“This means that the effective interest rate on quick credit is now 16 percent per annum,” GTB said in the email to clients. This is coming from a peak of around 25 percent.
Commercial banks have been put on their toes by the Central Bank of Nigeria (CBN) to lend more to individuals and small businesses in a bid to stimulate a sleepy economy.
The CBN threatens steep transactions for banks that are unable to lend atleast 65 percent of their deposits.
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On 7 January, the CBN circulated a directive that Nigerian banks must maintain a minimum 65 percent loan-to-deposit ratio (LDR) by March 2020, or CBN will impose a 50 percent cash reserve requirement (CRR) equal to the lending shortfall on deposits.
The CBN in July 2019 imposed a minimum LDR of 60% for Nigeria banks and in September 2019 increased the minimum to 65%. As of October 2019, the system’s LDR ratio was 61.9%, according to the latest CBN data, indicating that some banks do not yet meet the requirement.
While the directive has forced banks to open the lending taps- which holds benefits for the economy as individuals and businesses have better access to credit, which tends to boost consumption- there are some risks in forcing banks to lend.
Peter Mushangwe, a banking analyst at credit rating agency, Moody’s Investors Service, said the CBN’s directive may do more harm than good for the economy in the long term.
Although gross loans and advances increased 4% by October 2019 from July, when the regulation took effect, loans will need to grow by around NGN690 billion (about 5% of gross loans as of 31 October) to meet the minimum requirement by March 2020, according to Mushangwe.
“Given Nigeria’s challenging operating environment, meeting the minimum requirement will be credit negative for banks because we expect them to make potentially riskier loans, which will outweigh potential benefits from diversification as they lend to more granular borrowers and reduce their high single-name concentration risk,” Mushangwe said.
Nigerian banks have limited exposure to SMEs and household borrowers, who have a combined contribution of lower than 10 percent of total loans.
Consumer lending in Nigeria is hampered by weak household credit record history and higher incidence of nonperforming loans.
