The cost of doing business in Nigeria remains one of the perennial challenges facing business owners. They will soon be saddled with these hurdles due to higher borrowing costs caused by liquidity constraints in the banking sector. This comes amid other concerns that the shortage of available money in the sector will push interbank rate higher. Interbank rate is the rate at which banks lend money to each other. The development is not good news for the manufacturing sector, with the liquidity squeeze expected to impact on local production.
The average maximum lending rate charged by banks on loans rose to 35 per cent in Q2 2024, up from 28.6 per cent in Q1 2024. It is now over 35 per cent. With this, many businesses will be at risk. Last week, liquidity in the financial system reportedly deteriorated to N1.7 trillion due to lack of significant inflows to ease the prolonged shortage of funds in the banks.
Data from the Central Bank of Nigeria (CBN) show that Nigeria’s money supply recorded its worst first decline in 2025, falling to N110.32trillion in February from N110.94trillion in January. The 0.56 per cent month-on-month decline came despite efforts by CBN to manage liquidity in the system due to monetary tightening and foreign exchange adjustments. The sharp drop in money supply in the banking system, especially in February, reflects developments across both foreign reserves and domestic credit.
In February, net foreign assets declined by 8.62 per cent to N32.34trillion down from N35.39trillion in January 2025. The impact of the liquidity constraints is already affecting businesses as borrowing go very high, with Deposit Money Banks’ loans from the apex bank increasing daily. Figures from CBN showed that loans to banks surged to an all-time high of N1.2trillion in the first seven days of 2025, indicating a liquidity squeeze in the sector. The N1.2trillion loan to commercial banks represents the highest in five years and a 961 per cent increase from N114.26billion loan reported in the first seven days of 2021, N248billion in 2022, N329.2billion in 2023, and N151.3billion in 2024.
Statistics also show that since July 2024, banks have been borrowing from CBN to purchase foreign exchange (FX), a practice that has intensified inflation and piled up pressure on the naira. This is also due to rising demand by banks for Standing Lending Facility (SLF), an emergency loan to cover severe liquidity shortfall. The shortfall is largely as a result of huge outflows from CBN auctions, including undisclosed foreign exchange swap settlement, which is reported to have drained liquidity from the financial system. Though liquidity fluctuations are common issues in banking, however, the ongoing cost of borrowing and the monetary tightening by CBN is something that is already affecting critical sectors of the economy.
Data from the CBN showed that the average maximum lending rate increased to 29.79 per cent in January 2025, signifying high cost of borrowing from financial institutions. Some weeks ago, the CBN retained its Monetary Policy Rate (MPR) at 27.5 per cent, pushing up average maximum lending rate to 29.79 per cent in January. In December 2024, the maximum lending rate was 29.71 per cent. The steep increase in MPR has sparked concerns about the potential impact on the cost of borrowing for business owners who are already groaning under many government’s policies, such as high energy tariff, foreign exchange volatility as well as the harmonisation other forex market, all of which have not yielded the intended results.
The manufacturing sector has been hard hit by the cost of borrowing. In the first half of last year, the Manufacturers Association of Nigeria (MAN) said its members borrowed over N1.8trillion in order to remain in business. With high interest rates, businesses suffer, and the cost of production is pushed to the final consumers who are already hard done by government’s policies. Last week, MAN said its members were counting their losses due to the drastic macroeconomic reforms by the present administration.
Meanwhile, the aggregate index score of the manufacturing sector decreased from 53.5 per cent to 51.9 per cent. That is how bad the production base is. As a result of these difficulties, leading manufacturing companies in the country have reported over 90 percent loss in their 2024 financial results. This was driven principally by high cost of borrowing, inflationary pressures and FX volatility that has escalated production costs. We urge CBN to periodically review downwards its MPR to make borrowing affordable for businesses.