Low interest rate regime, opportunity for long-term borrowing

At present, the global market, including Nigeria is experiencing low interest rate regime, which seems to be seen as an opportunity to access longterm funds that can be used to improve the economy in terms of increased revenue generation.

The Central Banks across key economies in both advanced and developing countries are adopting expansionary monetary policy stance in order to stimulate economic growth.

Specifically, the Federal Open Market Committee (FOMC) of the U.S Federal Reserve System cut the interest rate in July 2019, the first rate cut since 2008, the Bank of Japan maintains a negative policy rate, and the European Central Bank keeps its interest rate at zero.

Furthermore, the Bank of England maintains the interest rate at 0.75 percent, which is considered low compared with the historical average of 3.89 percent between 2006 and 2009 the South African Reserve Bank lowered its interest rate in July 2019 and the Central Bank of Nigeria (CBN) also lowered its interest rate in

March 2019 and has indicated its preference for low interest rate, causing yields on fixed income securities to drop.

The CBN in March 2019 cut its benchmark interest rate by a 50 basis point to 13.5 percent from 14 percent since July 2016.

These strategies according to Ayodele Akinwunmi, head, research, FSDH Merchant Bank Limited have created easy money (low cost of fund) in the global financial market and by extension, in Nigeria.

“Individuals, companies and governments can now borrow money both from the domestic and foreign financial markets cheaper than in the last few months,” Akinwunmi said.

FSDH Research has observed that many banks and other credit providers in Nigeria have recently begun aggressively pushing credit to their customers.

The Monetary Policy Committee (MPC), at its last meeting in July, raised concern about the constrained growth in the monetary aggregates as an indication of weak financial intermediation in the banking system and called on the management of the CBN, to sustain the various initiatives of the Bank to improve lending to the private sector in Nigeria.

The Apex bank had given the banks September 30 as deadline for the commencement of 60 percent loan to deposit ratio, which was targeted at increasing credit to the real sector of the economy.

“We need support to achieve growth in Nigeria and it is important that when the MPC raised a concern about the flat loan rate deposit ratio, it was just about 57 percent which is too low whereas in other climes, loan to deposit ratio is more than 100 percent,” Godwin Emefiele, governor of CBN said after the last MPC meeting.

FSDH research said the FGN may also take advantage of the current low interest rate to access long-term debt and channel it specifically towards building the capacity of the economy to generate more revenue.

Investment in infrastructure, security, education, healthcare and other social safety net will improve the productivity of the country and provide an opportunity for government to generate future tax revenue.

“The current low interest rate should not be seen as an opportunity for individuals, companies and governments to increase deadweight debt,” Akinwunmi warns.

However, the low interest rate may not last forever; FSDH Research encourages economic agents to enjoy it while it lasts!

We need support to achieve growth in Nigeria and it is important that when the MPC raised a concern about the flat loan rate deposit ratio, it was just about 57 percent which is too low whereas in other climes, loan to deposit ratio is more than 100 percent