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Challenge of High Interest Rate and How To Fix It — Financial Analysts

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There is no doubt that over the years, high interest rate, which is the cost of borrowing money from a lender or the reward for saving, has been a major challenge in the country.

Nigeria’s benchmark interest rate has remained at 14 percent since July 2016 when it was increased from 12 percent.

In view of this, the focus of whoever will emerge the winner of the upcoming general election should be on how to address this problem that has resulted in high cost of credit to the real economy.

However, analysts from the financial services sector have come up with some suggestions on how the government can tackle the issue of high interest rate.

Ayodele Akinwunmi, head of research, FSDH Merchant Bank Limited, said provision of adequate infrastructure in the country, mainly power, electricity and transport network will help to reduce the cost of doing business in Nigeria, attract investments and develop the non-oil sector in such a way that there will be increased supply of foreign exchange, reduced demand for foreign exchange and increased revenue for the country.

“All these factors will help to reduce the risks inherent in the economy, ensure stable exchange rate and reduce inflation rate. Then interest rate can drop. Without these measures, interest rate will continue to rise. High interest rate is one of the prices a country pays for the risks inherent in its economy,” Akinwunmi said in an emailed response to BusinessDay.

The country witnessed a sharp drop in crude oil prices around July 2014, which fell to as low as $30 per/barrel in late 2015/ early 2016. Apart from that, there were other major shocks that adversely affected the economy. These included geopolitical tensions, global growth slowdown, and U.S monetary policy normalisation.

The Central Bank of Nigeria (CBN) at the time embarked on a cycle of tightening to rein in inflation. Inflation rate is currently at 11.28 percent from as high as 18 percent in January 2017.

Ayodeji Ebo, managing director, Afrinvest Securities Limited, sees high interest rate as a complex problem interlinked with several economic variables.

Ebo said the best way is to create an enabling environment that would de-risk the business operating environment. This can be achieved by improving infrastructure as well as easing the process of doing business.

“This will lower the credit risk premium over risk free instruments, hence reducing the maximum lending rate. As long as the operating risks remain elevated, the lending rate will remain high”, Ebo said in an emailed response.

One of the advantages of high interest rate environment is that the cost of borrowing by corporates and individuals as well as inter-bank lending rates is high.

What the banks usually do is to transfer the cost of borrowing from the Central Bank of Nigeria unto their customers, making loans expensive and less accessible.

Credit to the private sector declined by 0.1 per cent to N22.275 trillion at the end of June 2018, in contrast to an increase of 0.02 per cent at the end of the corresponding period of 2017, according to the CBN’s half year 2018 economic report. The development owed, wholly, to the decline of 1.1 per cent in claims on the core private sector.

In a recent report by the CBN, 23.5 percent of Nigerian households expected interest rate to rise on bank loans and savings over the next 12 months, while 14.6 per cent believed that the rates will fall. However, more respondents (61.8 per cent) of the respondents either expected no change or had no idea.

Since June 2009, the National Bureau Statistics (NBS) conducts the inflation attitudes survey on quarterly basis, to sample the views of households on how they view the price changes of goods and services in the last twelve months, and their expectations of price changes over the next twelve months. Respondents’ opinions were used to explore the general public’s understanding of monetary policy framework.

The Q3 2018 Inflation Attitudes Survey was conducted during the period September 24 -October 4, 2018, from a sample size of 1,770 households randomly selected from 207 enumeration areas (EAs) across the country, with a response rate of 96.9 percent.

The percentage of respondent households who felt that interest rates had risen in the last 12 months declined by 3.1 points to 29.3 points in the current quarter when compared to 32.4 points attained in Q2, 2018. On the other hand, 7.0 per cent of respondents believed that interest rates had fallen, 18.1 per cent of the respondents were of the opinion that the rates stayed about the same in the last 12 months, while 45.4 per cent of the households had no idea. The result revealed that more households had no idea on the direction of interest rate in the past 12 months.

On the other hand, the respondents were asked whether it would be in the interest of Nigerian economy for interest rates to rise or fall. The results showed that 34.4 per cent indicated that it would be best for the Nigerian economy if interest rates fell, while 15.6 per cent opted for higher interest rates. The results further revealed that 11.1 per cent thought that it would make no difference, while 38.3 had no idea.

These responses revealed that while most of the respondents favored lower interest rates for the Nigerian economy, while the majority had no idea whether it should rise or fall.

Results of survey conducted by the Manufacturers Association of Nigeria (MAN) shows that the average interest rate charged manufacturers (including SMEs) by banks in the second half (H2) of 2017 was 23.05 percent as against 22.65 percent in first half (H1) of 2017 and 21.4 percent in H1 of 2016.

Many banks are unwilling to offer loans to MSMEs and those that do often provide same at above 20 percent. Though experts say funding is not the biggest challenge facing small businesses, they unanimously agree that it is among the top four.

Nigeria has 37 million MSMEs that are expecting the government to recapitalise development finance institutions in the country.

The Bank of Industry (BoI), for instance, lends credit to entrepreneurs at about nine percent. The focus of the BoI is the industrial and value-adding sectors such as manufacturing, agro processing, entertainment and export, among others.

The Bank of Agriculture (BoA) also lends to farmers and those in the agric value chain. Ideally, BoA is supposed to lend to farmers at a single-digit rate, but the bank has been cash-strapped for a long time now. The bank officials are unhappy that they are not in charge of the Anchor Borrowers Scheme, which ordinarily could have increased the relevance of the bank, BusinessDay understands.

Similarly, the current government set up the Development Bank of Nigeria (DBN) in 2016 with a view to increasing lending to small businesses and development-oriented sectors. Entrepreneurs tell us that this bank lends to them at a double-digit rate of 13 to 16 percent.

Small businesses are expecting a single-digit interest rate to able to borrow from banks and unleash potential. Presidential candidates are challenged to present a blueprint on this.

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