Amid rising inflation rate that is expected to hike operating cost and plud profitability, banks have reduced maximum lending rate to 26.61 per cent, an over five-year low, the latest data by the Central Bank of Nigeria (CBN) on banks’ deposit and lending interest rates has revealed.

The CBN data revealed that In 2016, the maximum lending rate was hovering around 26 per cent and crossed the 31 per cent mark in 2017.

The drop involves a decline in lending rates to the real sector of the nation’s economy and increasing deposit rates on bank customers’ deposits.

The data on banks’ deposit and lending interest rates showed a 1.4 percentage points drop in the average maximum lending rate from 26.61 per cent in March 2022, as against 27.65 per cent in January 2022.

The maximum lending rate was at 30.73 per cent in February 2022 and it has dropped by 2.5 per cent to 27.85 per cent in December 2021 from 28.3 per cent it was in January 2021.

The CBN data indicated that interest on savings deposits closed March 2022 at 1.28 per cent from 1.25 per cent, representing an increase of 2.4 per cent Year-till-Date (YtD) performance.

Experts attribute the decline in maximum lending rate to excess liquidity in the banking sector.

Commenting, the President of the Association of the Capital Market Academics in Nigeria (ACMAN), Professor Uche Uwaleke believe interventions by CBN also forced banks to cut interest rate on loans to customers.

He explained that, ““When the money supply is high, it is expected to translate into low interest rates on lending to Bank customers.  The numerous interventions by CBN have forced down interest rates in the banking sector. The CBN has a lot of its intervention at single digit interest rate; moved from nine per cent to five per cent. When the CBN should have ended that regime of five per cent lending rate, it extended it further.

“The CBN has been extending loan facilities to key sectors of the economy and a lot of interventions are accessing these funds at single digit interest rate. The banks were forced to reduce interest rate in order to remain relevant in their major core business of lending to the real sector.”

He noted that the gap between saving and lending rates is huge, stressing that the CBN management have expressed concerns.

Speaking on increase in deposit rate, he added that the hike in deposit rate is meant to attract deposits and remain competitive.

“It is the competition that is pushing up interest on deposits in the banking sector,” he added.

The President, Bank Customers Association of Nigeria (BCAN), Dr. Uju Ogubunka attributed the decline in maximum lending rate to uncertainty surrounding the business environment amid political tension in the country.

According to him, “Once bank customers are not applying for loans as they used to, for sure the lending rate is expected to drop. When you have pressure on loan request, the rate is expected to go higher. Many people are not making moves to invest because of the insecurity, upcoming elections, among others.”

Ogubunka, who was the former Registrar/ Chief Executive, Chartered Institute of Bankers of Nigeria (CIBN) expressed that Nigeria’s economy in 2022 has not witnessed major improvement to warrant a hike in banking lending rate to the real sector.

He added that, “If there is no improvement in macroeconomy activities, it simply means there is no need to commit more funds into the business environment, leading to slow demand for loans.”

Ogubunka explained further that banks opted to increase the rate on saving deposits to attract savings since the funds are not available.

He questioned, “How many bank customers are still saving money in the bank? It is a demand and supply related issue. If bank customers do not give to banks, they will not have enough to lend to the real sector.

“Ordinarily, if there is surplus in the system, the pricing goes down but if you do not have enough and there is demand for it, you increase the rate. I think what is happening now is that so many bank customers are incapacitated that they cannot save due to inflation rate, among others.”

Speaking from a different perspective, analyst at PAC Holdings, Mr. Wole Adeyeye said the competition between the banks and Fintech companies forced down the maximum rate in the financial sector.

“For the month of March 2022, as the deposit rate increases, lending rate dropped. I think it has to do with competition between banks and other lending houses. Deposit rate actually increases which is expected to encourage people to deposit more funds. Banks are facing the reality of the CBN granting licence to MTN Nigeria and Airtel Africa to operate a Payment Service Provider (PSP) that is expected to commence soon.”

On the flipside, the CBN’s data revealed that the average prime lending rate hit a 14-month high to 11.85 per cent in March 2022.

Prime lending rate in its Year-till-Date performance has gained 1.4 per cent from 11.68 per cent reported in January 2022, while in Year-on-Year gained 6.4 per cent from 11.13 per cent reported in March 2021.

The average interest rate on one-month deposits dropped to 3.33 per cent in March from 3.79 per cent in January 2022, while three-month deposits also dropped to 4.41 per cent from five per cent in January 2022.

The apex bank’s Monetary Policy Committee (MPC) of the CBN since February 2021 maintained interest rate at 11.5per cent.

A member of the MPC, a Professor of Economics at the University of Benin, Mike Obadan had in his personal statement during the March 2022 meeting in Lagos  said, “A further tightening of monetary policy will not tame inflation. Rather, it will lead to an increase in lending rates of the commercial banks, limit access to credit, and hurt investment in the real sectors of the economy.

“Indeed, a further tightening policy will be antithetical to the CBN’s goal of increasing access of investors to cheap credit in order to aid economic   recovery, spur growth, increase employment and reduce poverty.

“On the other hand, easing monetary policy in the present circumstances could increase untargeted money supply growth and exacerbate inflation. The situation of low  growth, high unemployment and poverty incidence and double-digit inflation, no doubt, entails difficult policy choices.

“Nevertheless, output growth requires continuous policy support, especially monetary policy to complement fiscal policy which, for some time now, is characterised by weak fiscal space. Targeted development finance interventions of the CBN would need to be sustained to boost aggregate supply of goods and services in aid of non-monetary inflation control.”

The Deputy Governor, Financial System Stability, CBN, Aisha Ahmad, also in her personal statement said the committee has a window to use the tools at its disposal to fight inflation promptly while keeping an eye on output growth, stressing that a marginal interest rate hike, thus, signals the need to curb inflation and could tangentially  moderate foreign exchange pressures in the medium term by attracting foreign investors.

She added that, “While I acknowledge that a rate hike could potentially have a negative effect on real sector lending prices, this is mitigated by the Bank’s interventions which has broadened affordable access to loans.

“I am, therefore, convinced that sustaining these interventions, alongside a marginal increase in the monetary policy rate to combat inflation, would combine well to strengthen the recovery process.”