Banks’ lending rates not reflecting MPR hike
Despite the three conservative times of raising 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).
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.
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.
On september 27, 2022, the MPC, chaired by the CBN governor, Godwin emefiele raised the policy rate by 150bps to 15.5 percent. the increase raises this year’s total rate hikes to 400bps, making it the third consecutive increase.
According to Adenikinju, 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.
interest margins to total operating income rose between June 2022 and August 2022, however, total operating costs to total operating income declined from 76.5 percent in June 2022 to 74.7 percent in August 2022, though still way above the values for comparator countries: turkey, 34.1 percent, south Africa, 61.5 percent and Malaysia, 37.9 percent.
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.
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.
the report also showed increase in the aggregate banking system deposits, assets, and credit over the period.
“i should emphasise that the risk to domestic economic growth and financial stability of a hawkish stance at this time appears moderate and tolerable. Very much like the outlook for growth, financial stability prospects are evidently strong,” said, edward Lamatek, CBN’S deputy governor, corporate service in his personal statement at the last MPC meeting.
He said that at the end of August 2022, all the major soundness indicators of the banking industry were within their prudential limits. At 13.4 per cent industry capital adequacy ratio exceeded its benchmark by 3.4 percentage points. similarly, at 4.8 per cent, the non-performing loans ratio was less than the prescribed 5.0 per cent (prudential) threshold.
Meanwhile, industry liquidity ratio stood at 40.4 per cent in August compared to the benchmark of 30.0 per cent.
“i am of the view, based on these indicators, that the banking system is resilient and able to provide liquidity to sustain economic activity in a modestly constrained financial environment,” Lametek said.
“i was concerned that continued expansion in the monetary aggregates at the pace recorded in the first nine months of the year could aggravate monetary and price instability, he added.
Meanwhile, foreign asset (net) had remained on the path of contraction, thereby limiting the scope for sterilizing the expansion in domestic asset through foreign exchange sale.
On the other hand, he said the sale of financial securities alone for the purpose of reiningin excess liquidity may not be sufficient in view of the likely surge in spending in the rest of year as political campaigns gather momentum towards the general election. the unfavourable short-term outlook for system liquidity boosted my inclination towards deploying multiple instruments.
shonubi, Folashodun, the CBN’S deputy governor, operation, said improvement in resilience of the banking sector was underscored by the sustained positive trend in major prudential ratios.