More difficulties for borrowers as banks hike lending interest rates in line with MPR

BORROWERS of money in Nigeria may be facing more difficulties as Deposit Money Banks (DMB) have started adjustments to their prime lending rates in conformity with the new regime of increased Monetary Policy Rate of the Central Bank of Nigeria (CBN).

Specifically, most banks have sent advisory emails to their customers and debtors informing them of the latest development.

The CBN rate is the overnight rate banks and other financial institutions use to lend money to each other. It is then used as a reference point, known as an index, by financial institutions and set interest rates based on that index often adding a profit margin based on the borrower’s credit history and other financial details and what kind of risk that poses for the lender.

One of such mails from Unity Bank titled “Notification of Change in lending interest rate, “ reads: “Dear Esteemed Customer, In line with our commitment to keeping you informed about policy development and revisions, kindly be informed that the Central Bank of Nigeria (CBN) increased the Monetary Policy Rate (MPR) from 18.75percent per annum to 22.) per annum. ,

“In line with this development, Unity Bank has adjusted its Prime Lending Rate (PLR) from 26percent per annum to 30 percent per annum. This means that the interest | on your existing facilities with us will be updated accordingly.

“Please be advised that these changes will be implemented within ten (10) d from the date of this notification, as per the CBN Guide to Bank Charges. If you have any questions or concerns, please do not hesitate to contact 24/7 customer experience center….”

Each bank offers different lending rates that reflect their respective approaches to lending to the manufacturing industry.

Experts say the prime rate indicates the best possible rate offered to the most creditworthy customers, while the maximum rate suggests the upper limit of interest rates for loans to the sector, which might apply to higher-risk scenarios or different loan structures.

Meanwhile, reacting to the increased MPR, the Chairman of the Bank Directors Association of Nigeria, Mustafa Chike-Obi, said the Central Bank of Nigeria (CBN)’s decision to hike interest rates in the past two Monetary Policy Committee (MPC) meetings will severely harm the real economy, leading to limited economic growth and increased unemployment levels.

He stated this during an interview on the Gist Nigeria program aired on Channels TV, where he commended the apex bank for its efforts in taming inflation but warned that they would come at a cost.

According to him, the objectives of the MPR hikes are laudable in terms of supporting the naira and combating inflation but they come at a cost on the real economy.

In his words, “The CBN says they are doing that because they want to support the naira and fight inflation – laudable goals. But they come at a cost, the cost of doing those two things is that you are going to have your growth severely limited, you are going to have unemployment rise and companies closed.”

Furthermore, Chike-Obi noted that the MPR hike will shrink the banking business in the future by reducing the number of people and businesses that can take credit facilities.  Such declines in business activities, he said, will be compounded by the need to raise capital to meet the CBN’s new capital requirements.

He also noted that the CBN’s recapitalisation plan would be difficult for banks to execute, noting that investing in banks comes with risks compared to other options like treasury bills.

Available records show that several  African countries are grappling with inflationary pressures, prompting their central banks to raise rates. Countries such as Egypt, Nigeria, and Malawi are leading the pack as soaring inflation rates and rapidly declining currencies necessitate a hawkish stance from African central banks.

For example, escalating inflation in Nigeria that hit 31.7 percent in February 2024 caused the CBN to hike the monetary policy rate – the benchmark interest rate – by 600 basis points to 24.75 percent in March 2024. Also, the Egyptian Central Bank raised the country’s interest rate by 600 bps to 27.25 percent this year due to inflationary pressures.

On April 9, 2024, the Bank of Uganda raised its interest rate by 25 bps to 10.25 percent, even as the country’s inflation rate has continued to see a marginal decline from 3.4 percent in February 2024 to 3.3 percent in March 2024. Uganda has a core inflation target of 5 percent.

During its Monetary Policy Committee in February 2024, the Bank of Zambia hiked the country’s MPR by 150 bps to 12.5 percent. According to the bank, the move was geared towards steering the country towards a 6-8 percent inflation rate target.

Zambia’s inflation rate is currently on an upward trajectory, hitting 13.5percent in February 2024 from 13.2percent in January

The Central Bank of Kenya maintained its interest rate at 13.00 percent during its meeting on April 3, 2024. Interest rate in Kenya was raised from 12.5 percent to 13 percent in February 2024. The country’s inflation rate for March 2024 hit 5.7 percent, down from 6.31 percent posted in February 2024. This Kenya is well within the range of achieving its inflation target of 5.0 percent.

The Central Bank of the Gambia maintained its monetary rate at 17.00 percent during its meeting in February 2024. The country’s inflation rate in January 2024 hit 16.2 percent, down from 17.3 percent posted in December 2023.

In March 2024, the Angolan Central Bank hiked the benchmark interest rate to 19.00 percent, from 18.00 percent. The bank resumed the monetary tightening cycle due to its 24 percent inflation rate in February 2024. However, the rise in inflation was linked to currency depreciation and increase in fuel prices due to the removal of subsidies

In February 2024, Malawi’s central bank hiked its benchmark interest rate by 200 bps to 26.00 percent, citing persistent inflationary pressures as the reason.

As of February 2024, Malawi’s inflation rate hit 33.5 percent, marking a decline from the 35 percent posted in January 2024.

Egypt currently possesses the second highest interest rate in Africa, after hiking its MPR by 600 bps to 27.25 percent in March 2024. The move by the Egyptian central bank became necessary to drive investment to the North African country, as the country was battling a foreign currency crisis.

The move was also necessitated by persisting inflationary pressures in Egypt, as the country’s inflation rate hit 33.7 percent in March 2024, down from 35.7 percent in February 2024.

Ghana is facing arguably its worst economic crisis in modern history. Thus, in January 2024, the Bank of Ghana cut its interest rate by 100 bps to 29.00 percent. The country’s inflation eased to 23.5 percent in January 2024 from 52.8percent recorded in February 2023. However, in March 2024, Ghana’s inflation rate climbed back to 25.8 percent.

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