Banks keep lending costs high despite CBN’s rate cut

By Uche Usim

Commercial banks have yet to reduce their lending rates nearly one week after the Central Bank of Nigeria (CBN) cut its benchmark interest rate by 350 basis points.

Tongues are wagging as many wonder when borrowers will begin to feel the impact of the policy change.

The CBN, at its Monetary Policy Committee (MPC) meeting on September 22, cut the Monetary Policy Rate (MPR) from 26.5 per cent to 23 per cent, its biggest single reduction in nearly two decades.

However, checks reveal that lending rates across banks remain high, ranging from about 20 per cent to as much as 46 per cent, depending on the borrower’s risk profile, the bank’s funding cost and its pricing model.

The development means that, for now, the CBN’s lower benchmark rate has not translated into cheaper loans for individuals and businesses.

A senior official of a Tier-1 bank, who spoke anonymously because he was not authorised to comment publicly, said the bank had no immediate plan to reduce its lending rates.

The official indicated that any immediate adjustment could affect deposit rates, particularly savings rates linked to the MPR, rather than loan rates.

At another major bank, decisions on lending rates are expected to be considered by its Asset-Liability Committee (ALCO), which reviews factors such as the bank’s cost of funds, liquidity and regulatory requirements before changes are made.

The delay has renewed concerns about monetary policy transmission, the process through which a CBN decision eventually affects the rates banks charge customers.

The CBN had explained that its decision to reduce the MPR was largely an operational reset aimed at bringing the official benchmark closer to actual market rates.

According to the apex bank, the previous 26.5 per cent MPR had become disconnected from prevailing market rates, with interbank rates trading around 22 per cent.

The CBN also retained the cash reserve requirement (CRR) for deposit money banks at 45 per cent and merchant banks at 16 per cent, while adjusting the standing facilities corridor to +50/-300 basis points around the new 23 per cent MPR.

Business groups have called for the reduction to be reflected in the cost of borrowing.

The Manufacturers Association of Nigeria (MAN), for instance, warned that the MPR cut would have limited impact on manufacturers if commercial lending rates remain around 30 per cent.

Its Director-General, Segun Ajayi-Kadir, said what matters to businesses is the actual interest rate they pay when borrowing from banks.

Similarly, the Lagos Chamber of Commerce and Industry (LCCI) said the key issue was whether the lower policy rate would be transmitted to lending rates and increased access to credit, particularly for small and medium-sized businesses.

For borrowers, therefore, the key test of the CBN’s latest rate cut is not the reduction in the official MPR alone, but whether commercial banks eventually bring down the interest rates charged on loans.

Until that happens, businesses and individuals seeking bank credit may continue to face relatively expensive borrowing costs despite the CBN’s move to lower its benchmark rate.