Why banks’ lending rates did not reflect MPR hike – MPC members

Despite the three conservative raising of the Monetary policy Rate (MPR) by the Central Bank of Nigeria (CBN), lending rates by the banks have not reflected the increase, according to members of the Monetary policy Committee (MPC).

On september 27, 2022, the MPC, chaired by the CBN governor, Godwin emefiele raised the policy rate by 150 basis points (bps) to 15.5 percent.

the increase raises this year’s total rate hikes to 400bps, making it the third consecutive increase.

Consequently, data from the CBN show prime lending rates,which are the interest rate that banks charge their most creditworthy customers, increased marginally by 0.27 percentage points to 12.23 percent in October 2022 from 11.96 percent in May 2022, when the CBN raised the first monetary rate this year.

similarly, maximum lending rates, which is the average highest amount charged by banks for lending to riskier sectors, rose by 0.69 percentage points from 27.37 percent in May 2022 to 28.06 percent in October the same year, the CBN data published on its website indicated.

the inability of the retail rates by the deposit money banks to reflect the increase in the MPR suggest either the weakness of the MPR as an effective instrument to target credit creation process by the commercial banks, or the rate increase by the MPC is not sufficient to reduce the liquidity held by the banks, Festus Adenikinju, member of the MPC, said in his personal statement.

Data from the CBN revealed that Nigerian banks’ net domestic credit (NDC), consisting of loans to the private sector and the government, has maintained a steady increase, rising to an all-time high of 3.53 percent to N63.33 trillion in september 2022 compared to N61.17 trillion in August 2022, despite the monetary policy tightening by the Central Bank.

taiwo Oyedele, head of tax and corporate advisory services at pwc, said a possible reason for this could be that banks were able to mobilise more deposits from customers following the recent increase in deposit rates, especially on savings accounts.

Adenikinju noted from his personal statement that between July and August 2022, prime lending rate rose marginally from 15.53 percent in July 2022 to 16.44 percent in August 2022. Maximum lending rate remained flat at 26.86 percent, while the average savings rate rose from 1.07 percent in July 2022 to 1.79 percent in August 2022. time deposits rose to 5.59 percent in August 2022 from 4.69 percent in July 2022.

According to him, the banking system stability review report showed that the banking system remains safe, sound, and resilient. Capital Adequacy Ratio (CAR) declined from 14.1 percent in June 2022 to 13.4 percent in August 2022, but still lies within the prudential requirements.

Non-performing Loans (NPL) ratios declined from 5.0 percent in June 2022 to 4.8 percent in August 2022. Liquidity Ratio stood at 40.4 percent in August 2022, which was higher than the 30 percent prudential requirement. Both Returns on equity and Returns on Assets rose between June 2022 and August 2022.