Why Nigerian Banks Cannot Lend You Money Below 14%

Why Nigerian Banks Cannot Lend You Money Below 14%

The Reserve Bank of Australia, i.e. Australia central bank like Central Bank of Nigeria (CBN), has cut interest rates to a new record. The banks’ bank lowered the cash rate by 0.25% to 1%. That news has sent shares up in Australia since the cost of capital will be lower, possibly boosting investment and the overall economy.

Australia does not have to worry on many challenges Nigeria’s central bank deals with daily. Our inflation remains a critical factor which continues to drive monetary policy. That inflationary element is the reason why the central bank cannot lend to banks at 1%.

But just imagine if CBN can lend at 0.25% to our banks, great things will happen (keeping the bad things constant). Yes, the implication is that after banks have added buffers for NDIC (deposit insurer) and profit, our banks can be lending at 4% to Nigerians.

But when our banks begin at say 11%, it makes it challenging for any to lend below 14% since they have to cover costs, insure the money and also make small profits.

So, stop saying that Nigerian banks are not helpful because they cannot lend you at single digit. Largely, no bank can do that in Nigeria because they receive money from CBN at 11%. Unless the fund is coming from a special source, going below 14% will be lack of fiduciary responsibilities to their shareholders.

Besides, the banks are not open to lend for long tenor since Naira loses value in months. There is no way they can take that risk since N20 million in 2010 is not the same, on purchasing value, in 2019 even though the face value is the same. Our inflation is legendary making it harder for anyone to take risk on the Naira for a long period. Yes, they cannot fund that airport because by the time you pay back, the Naira you will ship back to them may not cover up to 20% of the effective purchasing power of the money loaned.

Our challenge is huge and we need to walk out of them. CBN cannot do magic. The banks cannot do magic. Unless we have an economy on equilibrium where we produce more in Nigeria, it will be a long harmattan. The hope is the evolving entrepreneurial capitalism which can redesign the economy so that we make more things in Nigeria. Oil has never been part of the solution – we need to make entrepreneurs to rise in Nigeria.

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4 thoughts on “Why Nigerian Banks Cannot Lend You Money Below 14%

  1. The first question to resolve is our understanding of inflation, and how CBN has managed it over the years. Why do price of things suddenly go up, and how is the price increase proportional to input cost?

    If we keep robbing one another in this country and somehow expect positive change, then we may never wake up from the dream land; the road is long and turbulent.

    If the CBN needs help, the fiscal managers need help, and the banks also need help; whose responsibility is it to be supplying the retinue of help needed by various entities? All the money we wasted in defending the Naira, doing everything possible to keep the value at artificial rate, who is accounting for it? And how many policies has CBN admitted to have failed, despite the cost, or is CBN not equally wasteful for years now?

    Many things appear fuzzy in our economic management policies, and what is not known far outweighs what is known, and yet we keep papering the cracks.

    The local content policies always fall short, because it’s either the enablers are lacking or we simply do not want them to work. Strange place!

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    1. Not really – high interest reduces the amount of money in circulation by reducing borrowing. So, high interest rate cannot just cause inflation. While high interest causes prices of goods to be high, it is not the root cause of inflation.

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