News Column

Bankers' Committee Concur With Emefiele On Phased Cut in Interest Rates

June 23, 2014

The decision of the Bankers Committee to speak in one voice with the new leadership of the Central Bank of Nigeria over the latter's plan to reduce interest rates, at a later date, is a plus for the new CBN Governor, Godwin Emefiele, and the Nigerian economy, reports Festus Akanbi

An indication that the new Governor of the Central Bank, Mr. Godwin Emefiele, may have secured the backing of his former colleagues at the helm of affairs of the various banks came last week with the endorsement by the Bankers' Committee of his plan to bring down interest rates. It is however instructive that the Committee gave a proviso, in sync with Emefiele's plan, that the cut in interest rates will not be effected in a one fell swoop. The committee, made up of chief executives of banks, said at the end of its 316th meeting in Abuja that the reduction of interest rates would take a gradual process. The committee said the current interest rate regime was still suitable given the prevailing fundamentals of the economy.

It noted there were many impediments to any immediate decision to lower the interest rates. The committee listed some of the impediments to any country's interest rate regime to include rate of inflation, type of exchange rates desired, the cost of funds of the banks, cost of providing infrastructure and cost of providing personnel. The CBN, the committee said, found the current interest rate environment suitable, if not the most desirable. Managing Director, GTBank Plc, Mr. Segun Agbaje, who spoke on behalf of the committee maintained that in the short to medium term, interest rates are likely to stay where they are as the fundamentals of the economies remain fixed.

Same Agenda, Same Timing Money market analysts that dissected the position of the bank chiefs said there was no difference between the direction of the new governor of the apex bank on interest rate reduction, considering the fact that Emefiele had made it clear that the planned reduction will be implemented at a later date, precisely after the 2015 general elections. The CBN helmsman, had at his maiden media parley earlier in the month, noted that Nigeria had one of the highest interest rates, compared with some emerging markets like South Africa, Brazil, India, China, Turkey, and Malaysia. Such high rates, he said: "create a perverse incentive for commercial banks to simply buy virtually risk-free government bonds rather than lend to the real sector." Making clarifications few days later however, the CBN governor said there were no immediate plans to cut interest rates and definitely would not consider doing so until after the presidential election in February 2015.

Emefiele had told THISDAY that the plan he enunciated during his maiden media briefing was not intended to rock the boat, explaining that the apex bank will be on top of the situation to ensure that when the rate cut eventually begins, the market would have really prepared for it. It was gathered that the assurance from the apex bank governor had doused initial tension that greeted the unveiling of the governor's agenda and it had also gone a long way in reducing volatility in the market. They also helped the naira to recover some losses triggered after Emefiele had said at his inaugural press conference that he would seek to gradually lower interest rates, which the market took as an indication that a rate cut could come soon. "The market has also calmed since the new central bank governor made the clarification on his plan to gradually reduce interest rates, which was one of the reasons the market was jittery previously," one dealer said.

His decision to lower interest rates signals a departure from the hawkish monetary stance of his predecessor, Sanusi Lamido Sanusi, who kept the Monetary Policy Rate (MPR) unchanged at 12 per cent for two years and cut inflation to single digit. Speaking at a press briefing in Abuja on his five-year vision for the central bank, Emefiele had said his policies would be people-centric and foreclosed the devaluation of the naira, pledging to maintain exchange rate stability. Rates have stayed at 12 per cent since late 2011, helping bring down inflation but businesses say they are punitive.

Pressure from Real Sector Operators Trade groups such as the Manufacturers Association of Nigeria (MAN) and Lagos Chamber of Commerce and Industry (LCCI), among others have consistently listed the regime of prohibitive interest rates as the major obstacle to industrialisation in Nigeria. This position was corroborated by the Chief Executive, Institute of Credit Administration, Dr. Chris Onalo. According to him, "As the country seeks to forge inclusive growth and create jobs, it is important to put in place a robust system to encourage banks to lend to small businesses." Dr. Onalo believes this will go a long way in creating jobs and forging inclusive growth in the country.

On paper, there are several funding options available to a Nigerian business person who wants to set up a new business or expand an existing one. For instance, Nigeria boasts of 21 money deposit banks and two specialised government banks set up to fund large-scale industry projects, as well as 871 microfinance firms authorised to lend to small-scale businesses and entrepreneurs. However, the irony is that in spite of this official provision, it is still difficult for many entrepreneurs and small-scale businessmen to start companies by borrowing from a bank, writes Joseph Adeyeye in Africa In Fact, an online journal. The fact is that most of the financial institutions are requesting for conditions that are difficult for small companies to meet, (especially) collateral, as findings showed that the banks charge about 27 per cent interest rate per year and everybody is complaining that it is on the high side. "Figures from, a website that compiles world interest rates, show that Nigeria's interest rate is one of the highest of Africa's large economies. Nigeria's current MPR of 12 per cent is higher than the prevailing rates of three per cent in Morocco, 4.5 per cent in Tunisia, 5.5 per cent in South Africa, 8.25 per cent in Egypt and 9.25 per cent in Angola," the report stated.

Rate Cut Not Now But in his attempt to defend the banks' position, Agbaje said all the components as well as the macro-economic factors of a country come into what ultimately determines the cost of fund before the banks can determine or charge interest rates. According to him, it is illogical to have an interest rate that is lower than the level of inflation in view of the various macroeconomic implications for the country. He, however, insisted that as the country continued to deal with issues as interest rates and import substitution, Nigerians would start to see interest rates considerably move downwards. Agbaje pointed out that with price stability at the fore front of the new leadership at the CBN; it meant that exchange rate stability was an initiative that would be sustained. Noting CBN's effort to keep inflation at a single digit, Agbaje said in order to sustain macroeconomic stability, all the monetary policies should ensure that Nigeria continues to have single digit inflation.

He said: "The current interest rate environment is not the most desirable. So where we are today and what I would consider the short to medium term is one in which interest rates are likely to stay where they are." The Central Bank's Director of Banking Supervision, Tokunbo Martins, said the new CBN governor was passionate about the reduction of interest rate. Martins, however, admitted that this would be done gradually as it was not something that could be done in the immediate future. She assured that the governor, along with other operators of the banking system, would strive to achieve a lower interest rate at the appropriate time in the long run.

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Source: AllAfrica

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