Assessing CBN’s Interest Rate Cap on Savings Deposits

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The Central Bank of Nigeria’s recent review of interest charge on savings deposits has the potential to spur growth as well put the banks on the back foot, writes James Emejo

For quite a while, the Central Bank of Nigeria (CBN) had come under increasing pressure to intervene in interest rate charges particularly lending rates by banks, which never appeared to respond to downward adjustments in monetary policy rate.

The cliché that whatever goes up doesn’t come down seemed to have permeated every sphere of the economy, as prices hardly adjusted downwards even when other variables point to that effect.

Severally at the monetary policy committee meetings, the CBN had always been heckled with questions on how it intended to ensure that some monetary policy reviews including interest rate cuts also reflected in lending pattern by banks.

The fact that banks have obligations to make profits for their shareholders is often a consideration, which could not be ignored on the one hand, but the CBN Governor, Mr. Godwin Emefiele, had also referred to the constitutional role of the industry to support the growth and development of the economy on the other hand.

The CBN in further pursuit of its mandate to ensure price stability as well as stimulate economic growth last week took the banking industry by surprise by reviewing the minimum interest payable on savings deposits as provided in its Guide to Charges by Banks, Other Financial and Non-Bank Financial Institutions issued in December 2019.

The policy, which took effect from September 1, stated that interest on local currency savings deposits shall be negotiable subject to a minimum of 10 per cent per annum of Monetary Policy Rate (MPR), as against the 30 per cent it was previously.

The policy decision which was conveyed in a circular to all banks which was signed by CBN Director of Banking Supervision, Mr. Bello Hassan, further predicated the move on the “satisfaction the recent declining trend in market rates in the banking sector following the implementation of policies aimed amongst others, at stimulating credit flow to the real sector.”

One of the biggest challenges to businesses and growth had been the high costs of borrowing in the economy particularly from commercial banks which are often reluctant to extend credit to the real sector especially SMEs which remained critical for economic transformation.

However, the several recent policy measures by the apex bank had seen interbank lending rates crash in times with marked reduction in cost of funds.

However, analysts who spoke with THISDAY on the latest review of savings deposit charges by banks have highlighted the implications of the policy going forward.

They pointed out that the review had the potential to reduce lending rates, boost investment by channeling affordable credit to SMEs and thereby creating enjoyment opportunities.

The analysts also believed that the policy will ensure that banks no longer enjoyed the benefits of sitting on huge deposits as they will be compelled to lend to the real sector at lower rates.

They observed that though higher interest rates help people to save more for higher income, this could as well make borrowing more expensive and negatively impact on the level of investment.

Speaking to THISDAY on the development, the acting Managing Director/Chief Executive, UCML Capital Limited, Mr. Egie Akpata, described the policy as a game-changer for industry profits, adding that there will be massive exodus of investors to money market funds which pay higher interest rates of between three per cent to five per cent.

He added that the new directive will discourage people from keeping money in savings account as well as compel them to rather invest in other money market instruments and the productive sector.

Akpata noted that savings account interest rate which has by the latest CBN directive dropped from about 3.75 per cent to 1.25 per cent was not entirely bad as this was still better than the 1.15 per cent on 91-day Treasury Bill.

Also commenting on the significance of the review on deposits rates charges, Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelleng, said expansionary policies are required to boost growth adding that though the CBN had not taken the step to further drop MPR, it has nevertheless, increased Loan to Deposit ratios (LDR) in the past in a bid to ensure banks lend more to MSMEs.

He said: “The move from CBN is designed to channel funds away from sitting idly in savings accounts into the real sector.

“For customers, it means that the returns they get from their bank savings will reduce from about 4 per cent down to 1.25 per cent and banks would pay out less in interest expense and this in turn should in theory allow for a reduction in lending rate to the real sector”

Shelling pointed out that, “The use of this moral suasion by the CBN will likely see investors channel funds into the capital markets in order to get returns above the current inflation rate.

“It would also mean that banks are no longer enjoying the benefits of sitting on huge deposits and would be compelled to lend to the real sector at lower rates.”

According to him, what the economy needs right now is for businesses to boom. One of the major factors that limits the growth of businesses is access to cheap finance.

On his part, economist and former Director General, Abuja Chamber of Commerce and Industry (ACCI), Dr. Chijioke Ekechukwu, said some banks were indeed paying lower rate than 1.25 per cent while others paid nothing.

He said though the review “does not amount to much in naira term, it is better than keeping funds with banks and customers were paid nothing for their savings.”

He said the present era was characterised by “very low interest payments on deposits by deposit money banks, which does not translate to low lending rates.”

According to him, the CBN came up the minimum of 10 per cent MPR payment as savings account interest. This means that at any time, savings account holders will be paid at least 10 per cent of the prevailing MPR which is currently 12.5 per cent.

“As at today, no savings account holder will receive less than 1.25 per cent per annum interest on their average monthly balance.”

However, an Associate Professor of Agricultural Economics at University of Port Harcourt, Anthony Onoja, told THISDAY that with the ease of access to funds, investors especially the SMEs can easily borrow to start up new businesses or expand existing businesses thus creating more job opportunities and increase in disposable incomes in the economy.

According to him, when there is huge savings deposit in the economy, this would naturally crash interest rate and banks have more funds to lend to investors.

He said the policy will equally go a long way in boosting aggregate demand as well as promotion of exports adding that, “If these happen the likelihood of sliding into recession which looms in Nigeria now can be averted.”

Nevertheless, the CBN’s intervention is in tandem with Emefiele’s five-year roadmap to stabilise the economy.

One of the cardinal pillars of his economic liberation policy is to “leverage monetary policy tools in supporting a low inflation environment, while seeking to maintain stability in our exchange rate.

Emefiele had said: “We would also strive to continue to

sustain a positive interest rate regime to the delight of our important stakeholders.

“Monetary policy measures embarked upon by the CBN will be geared towards containing inflationary pressures and supporting improved productivity in the agricultural and manufacturing sectors.”