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.