World Bank says Nigeria’s central bank’s low-interest loans undermine commercial banks

The World Bank has stated that the Central Bank of Nigeria’s low-interest loans undermines commercial banks that lend on a risk-adjusted pricing basis and needs to be dialled down

This was disclosed by the World bank in a document titled ‘Nigeria Development Update (June 2022): The Continuing Urgency of Business Unusual.’

The CBN decided to maintain a 5% annual interest rate for its development finance activities or intervention funds through March 2023.

This comes on the heels of the monetary policy committee’s decision to raise benchmark monetary policy interest rates from 11.5% to 13%. This type of rate hike frequently leads to an increase in lending rates across the board.

What the World Bank is saying

World Bank said, “The CBN’s continued provision of heavily subsidised funding to certain sectors undermines commercial banks that lend on a risk-adjusted pricing basis and needs to be dialled down.

The Bank stated that CBN didn’t publicly evaluate the impact of additional interventions as the credits from the apex bank to the private sector surged. The bank said,  “CBN disbursements are growing in funding the private sector, with the CBN’s share of private sector credit rising from about 6.5 per cent at end-2019 to 10 per cent by end-2021. Although some of the COVID-related tools deployed by the CBN are being phased out (e.g., the moratorium on principal repayments on CBN-funded credits lapsed in March 2022), the Central Bank has introduced new intervention facilities without a publicly available evaluation of their impact.”

The bank added, “The CBN also stepped up disbursements and kept the monetary policy rate unchanged at 11.5 percent from September 2020 until May 2022. On March 15, 2022, the CBN extended the five per cent per annum interest rate on its development finance intervention funds for one more year through end-February 2023.”

What you should know

• Under the CBN interventions, the 5% per annum interest rate paid by the receivers of the loan is akin to a subsidy as the loans originally attract an interest rate of 9% per annum. And even at 9%, the rate is still a huge discount when compared to high rates charged by commercial banks.
• The apex bank’s decision to keep intervention fund interest rates at 5% reflects its goal to continue to encourage economic growth in key sectors that it funds while allowing rate increases in other areas.
• Inflationary tendencies have been driven by higher energy charges and rising food prices from two of the industries that have benefited the most from subsidized interest rates (power and agriculture, respectively).
• Nonetheless, the cost of capital has risen as Nigerian commercial banks adopted interest rate hikes for loans of up to 200 basis points (2 per cent).

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