There are some nice questions in my piece explaining why lending rates are high in Nigeria.
Question: My bank in Lagos has increased the lending interest rate on my existing loan. Is that legal?
My Response: Yes, it is actually legal and it is universal. Sure, for years, Nigerian banks were simply quoting absolute percentages on consumer lending. However, in the last few years, as our fiscal policies become exceedingly convoluted, you quote thus, “Prime lending rate + bank interest rate”. The first component is a number determined by the Central Bank of Nigeria, the rate it lends to commercial banks. The second is what the bank has as its own interest rate. While the bank’s rate can be constant, the prime lending rate varies, as determined by CBN.
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So, if your loan document has a clause which allows a bank to adjust the total interest based on the prime rate, and if the prime rate goes high, your interest rate goes up. Of course, if the prime rate drops, your interest rate should also drop (Good luck on that one though). (This type of loan is called a variable rate loan as the interest rate varies due to many factors including the prime rate. It is different from a fixed rate loan whose interest rate does not change.)
The real problem in Nigeria is that we do not have a standard loan sheet which brings clarity to consumers on what they’re accepting and agreeing on. That disclosure document should be pushed in the National Assembly.
Note: this practice is universal. See this credit card offer from Capital One Bank in the United States. Notice that “This APR [annual percentage rate] will vary with the market based on the Prime Rate.” So, as the prime rate set by the US Federal Reserve (US version of the Central Bank of Nigeria) varies, your interest rate moves.
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In Engineering, we are told that a solution that is not affordable is no solution. So, which sectors of the economy or industries have thrived with these scams we call lending rates? We just set up a system solely to scale miseries and poverty, but somewhat find ways to continously justify the malfeasance.
Of course crippling and stifling businesses is legal, since banks are not designed to lose money via lending, it’s only customers that should absorb the gyrations and fluctuations, even when the thinnest margin they are hanging on has been eroded.
It’s safe to say that we do not know what we are doing, since the practice is incapable of helping or advancing the very people who need it most.
These are banks that do little to no banking, rather can be seen as money warehouses speculating and giving themselves some high-five regularly.
Let the banks also start publishing the number of businesses they have scaled with their fantastic lending rates, at least it won’t be a bad idea to be proud of those great services they claim to offer. We do things that we struggle to explain the rationale behind them, yet we still don’t know how to do them any other way.
Mediocres are always great at defending their mediocrity.