Nigeria’s Lending Math – And Why Bank Loans Are High

Nigeria’s Lending Math – And Why Bank Loans Are High

Sure, some will be disappointed – now, he is supporting banks! I wrote and praised a public servant yesterday and many were disappointed. That was really strange: if we truly want to bring change, we need to be fair, and focus on the data. I am not an activist – I am an engineer; I use facts to make my calls. If you do well, I praise you. But if you do wrong, I offer my perspectives which may not matter. 

I read how people are abusing banks, on how they are frustrating SMEs in Nigeria. Before you accuse me that I am defending banks, I want to show you this table. I made it because I understand the business. I worked as a banker in Lagos!

Banks “borrow” from the Central Bank of Nigeria at 11.50% (latest number) and they have to insure that money. They have staff and operations to run. Then, they need to make profit to stay in business. By the time they are done, realistically, they should not lend below 17%!

For them to lend below 17%, it means that money is not coming from CBN, but from other sources which might be cheap (donor agencies, DFIs, etc). You may argue, what of the customers’ deposit which is “free”? There is nothing free there since if they lose your money, you will NOT take any excuse. In short, the risk has to be balanced. 

With the CBN lending-deposit-ratio where they need to lend a certain percent of the customers’ deposits to avoid fines, some banks prefer to pay the fines instead of losing your money. See it this way, a fine on N10 billion may be N50 million if the ratio is not hit. That is well better than trying to hit a ratio and lose N1 billion on a bad loan. Now, you can see why CBN fines have not drastically made your bank beg you to come and collect loans anyhow!

My point is this: for CBN to reduce that rate, inflation has to become manageable. If not, it cannot reduce the benchmark. Interestingly, there are many factors that come into play to manage that inflation and to a large extent, you need to be producing things and having a better economy.

Nigeria has a long way to go and everyone is a victim. And that is why we need to work harder. The U.S. can lend its banks at near zero-rate because its inflation is well under control. Nigeria does not have that privilege at the moment. So, we should not be abusing banks, but rather go and build our Amazons, Googles and Teslas, to strengthen the economy and make it possible to lend at 6%. Cursing and abusing bankers will not fix the rate! 


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One thought on “Nigeria’s Lending Math – And Why Bank Loans Are High

  1. The first question is, is this the best we can do? And the three percent profit margin, is it also sacrosanct? If it’s possible for banks to declare big profits, with little productivity in the economy, then it’s also possible to lend with one percent profit margin. This idea of not wanting to lose, while you are ready to throw the other party under the bus, is why nothing is advancing.

    If people who cannot think beyond the ordinary see this ridiculous explanation, they will conclude it’s a hopeless situation! But the only hopeless situation here is having hopeless people trying to sell hope to us.

    If everything they learned about classical or development economics is no longer relevant, then it’s time to upend everything and invent a new economic ideology, except we are admitting that innovation has reached a dead end.

    Who assigned percentages to inflation? People fiddle few things and tell you that your fate is decided, and you must agree with them, even when they know nothing!

    Everything is impossible and improbable, until someone who thinks unconventionally shows you light in the same place you only see darkness.


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