Amidst Macro Economic Challenges, Banks’ Prime Lending Rate Hit 13.67% in January
Amid severe macro economic challenges and increase in Monetary Policy Rate (MPR), commercial banks’ prime lending rate to most credit-worthy customers increased to 13.67 per cent in January 2023, a 1.99 per cent Year-on-Year (YoY) increase from 11.68 per cent in January 2022.
According to the Central Bank of Nigeria (CBN) “Money Market Indicators,” the January figure was a 24-month high and it came on the heels of Monetary Policy Committee (MPC) of the CBN hike in its MPR rate to 17.5 per cent.
Prime lending rate is averaging at 16.57 per cent from January 2006 to January 2023 and it reached its all-time high of 19.66 per cent in November 2009 and a record low of 11.13 per cent in March 2021.
The prime lending is largely determined by the overnight rate which commercial banks lend one to another. The rate is also important for retail customers, as the rate directly affects the lending rates, which are available for mortgage, small business and personal loans.
Recently, the CBN Governor, Mr. Godwin Emefiele admitted that the hike in MPR would increase cost of borrowing, especially in non-priority sectors of the economy.
Emefiele, however added that lending to key priority sectors, which had been identified to boost growth and generate employment, would remain at a single-digit interest rate of nine per cent.
He pointed out that the decision to raise interest rate was the last resort and a difficult one for the MPC, which had been crafting policies to stimulate economic growth as well as achieve financial stability.
He said the CBN had adopted a contractionary monetary policy stance in view of the aggressive rise in inflation in recent times, which had led to high food and commodity prices in the country.
Emefiele noted that CBN’s action was aimed at curbing inflation, on the one hand, and supporting growth of the economy, on the other.
He said the MPC was in a dilemma in arriving at a decision to raise the lending rate.
As a result, the apex bank governor explained, a drastic measure such as raising the benchmark lending rate was required to reduce monetary expansion in order to tame inflation.
Despite the increase in prime lending rate, maximum lending rate dropped by 0.02 per cent YoY to 27.63 per cent in January 2023 from 27.65 per cent in January 2022.
Maximum lending rate refers to the rate charged by banks for lending to customers with low credit rating.
According to THISDAY investigation, United Bank for Africa Plc as of January 27, 2023 has the highest prime lending in the general commerce sector, followed by Unity Bank Plc.
At 42 per cent, FCMB and Stanbic IBTC Bank in the period under review had highest maximum lending rate in the general commerce sector, followed by Keystone Bank Limited (36 per cent) and Heritage Bank (35 per cent).
The money market indicators revealed that Savings deposit increased to 4.29 per cent as of January 2023 from 1.25 per cent in January 2022.
The disparity between maximum lending and deposit rates have widened over the years particularly since 2009 topping a differential of about 10 per cent in most instances.
In Nigeria, large corporates perceived as having lesser risk with a history of generating consistent cash flows are offered prime lending rates, while small businesses and individuals perceived as having higher risk typically fall above the prime lending rate margin.
Analysts have attributed the increase in lending to the hike in MPR and severe macro economic challenges.
Speaking with THISDAY, the Head, Financial Institutions Ratings at Agusto & Co, Mr. Ayokunle Olubunmi, said the gradual increase in MPR impacted on average maximum lending rate since 2022.
He noted that the increase, of course, would affect businesses and probably reduced borrowing rate in the banking sector.
He said, “For businesses that have taken loans, they will be paying more interest rate on these loans and it will affect their profitability. Also, any businesses or individuals that wanted to borrow money now will think twice amid hike in interest rate.”
He added that, “The hike in MPR by CBN is a contractionary monetary policy. The move is to reduce the number of people that will take new loans and it will reduce the amount of money in circulation which is expected to reduce inflation.”
On his part, the Vice president, Highcap Securities Limited, Mr. David Adnori said the gap between the CBN’s lending rate and the maximum lending calls for concern in the banking industry.
According to Adnori, “The gap between the MPR and average maximum lending rate is almost doubled and it indicates a serious rant-seeking within the industry. The spread between the average maximum lending rate and MPR should not be more than 10 per cent and it means there is a serious rent-seeking activity in the banking sector that is eroding business activities.”
Speaking, the President, Bank Customers Association of Nigeria (BCAN), Dr. Uju Ogubunka attributed the increase in average maximum lending rate to uncertainty surrounding and inflation rate in the business environment amid political tension.
Ogubunka said Nigeria’s economy in 2022 has not witnessed major improvement to warrant a hike in banking lending rate to the real sector, stressing that the hike in prime lending is expected to impact increase cost of doing business in the country.