The World Bank has said the Central Bank of Nigeria’s low interest lending undermines commercial banks that lend on a risk-adjusted pricing basis and must be curtailed
This was revealed by the World Bank in a document titled “Nigeria Development Update (June 2022): The Continuing Urgency of Unusual Cases.’
The CBN has decided to maintain an annual interest rate of 5% for its development finance activities or intervention funds until March 2023.
This follows the decision of the monetary policy committee to raise the key monetary policy interest rates from 11.5% to 13%. This type of rate hike frequently results in higher lending rates across the board.
What the World Bank says
The World Bank said: “The CBN’s continued provision of heavily subsidized finance to certain sectors undermines commercial banks that lend on a risk-adjusted pricing basis and need to be curtailed.
The Bank said the CBN has not publicly assessed the impact of additional interventions as apex bank lending to the private sector increases. The bank said, “CBN disbursements are increasing in private sector financing, with CBN’s share of credit to the private sector increasing from around 6.5% at the end of 2019 to 10% at the end of 2021. Although some of the COVID-related tools deployed by the CBN are phased out (e.g. the moratorium on principal repayments of CBN-funded credits expired in March 2022), the Central Bank has introduced new intervention facilities without a publicly available assessment of their impact.”
The bank added, “The CBN also stepped up disbursements and kept the policy rate unchanged at 11.5% from September 2020 to May 2022. On March 15, 2022, the CBN extended the interest rate of 5% per annum on its intervention for development funding for another year until the end of February 2023.”
What you should know
- Under CBN interventions, the interest rate of 5% per annum paid by loan recipients is akin to a subsidy since the loans originally attract an interest rate of 9% per annum. And even at 9%, the rate is still a huge discount from the high rates charged by commercial banks.
- The apex bank’s decision to keep intervention fund interest rates at 5% reflects its aim to continue encouraging economic growth in the key sectors it finances while allowing rate hikes in others. areas.
- Inflationary trends were fueled by rising energy charges and rising food prices in two of the sectors that benefited the most from subsidized interest rates (electricity and agriculture, respectively).
- Nevertheless, the cost of capital has increased as Nigerian commercial banks have adopted interest rate hikes for loans of up to 200 basis points (2%).