*Says 22-35% high interest rate threat to NIRP

*IMF says rates are declining in other economies

*Private sector crowded out of borrowing

A drop in interest rate will assist manufacturers and other economic agents in Nigeria to grow the economy. This is the consensus of the Organised Private Sector, OPS, and other economic operators in the country. At the moment, interest rate ranges between 22-35 percent, which they decry to be too high for any productive venture. Interest rate is the price paid for money borrowed from banks. The Central Bank of Nigeria, CBN, has kept the rate at which it lend to banks at 12 percent which serves as the barometer for the direction of interest rate charged by banks.

While banks pay a paltry three percent on savings account, they charge about 22 percent for money lent out to customers. The margin between savings and prime lending rate has been increasing over time thus making the cost of funds in Nigeria one of the highest globally.

The OPS has, therefore, called on the CBN to ease its monetary policy rate of 12 percent, saying it is fuelling hike in interest rate and cost of borrowed funds to manufacturers by development finance institutions and commercial banks in the country to between 22-35 percent.

But the International Monetary Fund, IMF, in its World Economic Outlook report for April, which set the agenda for the 2014 Spring Meetings of the Bretton Wood Institution, said that real interest rates worldwide have declined substantially since the 1980s and are now in slightly negative territory. The ten-year global real interest rates, a weighted average of safe real interest rates across countries, has declined from an average of 5½ percent in the 1980s, to 3½ percent in the 1990s, to two percent between 2001 and 2008, and to slightly negative territory in 2012.

According to the IMF “The cost of capital has also fallen but to a lesser extent because the required return-on-equity has increased since 2000.  Over the medium term, real interest rates and the cost of capital are likely to rise only modestly from current levels.

Part of the reason is cyclical: the extremely low real rates of recent years reflect large negative output gaps in advanced economies.” The body in its study said that real rates and the cost of capital are likely to remain relatively low even when output gaps are eventually closed.

There are no compelling reasons to expect that long-term real interest rates will quickly return to the average level of two percent observed during the mid-2000s. The main reason is that the factors that have mostly contributed to the decline in real rates in the past recent years are unlikely to reverse substantially over the medium term (the conclusions here apply to the risk-free rate. While interest rates in some countries are as low as two to three percent in Nigeria, the prime lending rate is above two digits, making the cost of funds too high for manufacturers and entrepreneurs.

The OPS chiefs who spoke with FINANCIAL VANGUARD on the apex bank’s interest rate regime and its effects on small and big businesses and the economy as a whole, said “We are worried of the high Monetary Policy Rate (MPR) at 12 percent, which now keeps the interest rate high and expensive to borrowers as no bank would lend to customers at single digit, which is below its cost of 12 percent.” 

Manufacturers Association of Nigeria (MAN) arm of the OPS, in its 2013 Economic Report, noted that the interest rates on facilities given to MAN members ranged from seven percent to 35 percent in 2013 (including the BoI/CBN intervention window of seven percent).

“With the monetary policy rate (MPR) still maintaining the same level 12 percent in the last couple of years, it was difficult for manufacturers and indeed the real sector to access funds for operations as well as for expansion,” said MAN.
MAN further noted “Provisional figures from CBN show that credit to private sector fell from its level in December 2012 by N26.98 billion or 0.18 percent to N15.258.3 billion in the first quarter 2013. At this level, it was 46.4 percent lower than the proposed target of 46.2 percent for 2013 fiscal policy, but 8.1 percent above the level reported a year ago.

 “The MPC led by the central bank governor, still left the key monetary policy rate (MPR) consistently at 12 percent aiming at targeting ‘easy money ‘ at the disposal of the banks by introducing a 75 percent cash reserve ratio (CRR) on public sector deposits.
“ The higher CRR-which is the minimum balance that the banks are expected to keep with the apex bank -is a tightening measure intended to check excess liquidity in the banking system and this has the consequences of crowding -out on private sector borrowing.

“This move, which is expected to drain about N950 billion of extra liquidity from the banking system, are monies that may otherwise have gone to credit expansion to aid investment and job creation. Arguably, the CRR hike and other tightening measures in the past have correspondingly led to a reduction in loan availability, while loans may re-price upwards, making them more expensive.
Bank loans to the private sector in Nigeria climbed 7.0 percent in May 2013, from a year earlier, according to CBN data, which is below the apex banks loan growth target. Any slowdown in loan growth will be a drag on the economy, which expanded by 6.6 percent in the first quarter of 2013, away from 7.0 percent in fourth quarter 2012.
“The level of financial leverage in the economy is already low as total credit to private sector at N15.6 trillion is just 34.3 percent of the 2012 nominal GDP of N45.4 trillion. The equivalent level for China is 187 percent and 70 percent for South Africa respectively.
According to MAN “From our studies, we have discovered that in the last 10 years’ interest rates charged MAN members by banks have been at an average of 19.9 percent for most of the manufacturing sub-sectors, with an all time low of 16.4 percent average in the first half of 2012. Individually, some companies are charged as much as 35.0 percent and as low 7.0 percent for those who source their funds from the Bank of Industry (BoI).

“The disparity is viewed from the risk classifications of the companies with the multinationals being favoured with lower rate as against the SMEs, which are viewed as ‘high risk portfolio transaction customers. The interest rates declared to be charged by banks range from 14.0 percent to 27.0 percent. Bigger and older companies attract the lower limit of rates, while the medium, small and newer companies attract high rates. Higher interest rates of between 28.0 to 35.0 percent are usually charged as a result of default by companies in previous loan facilities given to them.
The Nigerian average prime lending for last year as declared by CBN at 16.6 percent in comparison further highlights the high cost of funds which manufacturers are faced with in Nigeria and which is one of the factors that have stunted the growth of the sector”.

In the same vein, Abubakar Badru, NACCIMA President, noted “With the current interest rates hovering between 17 percent and 28 percent and for a growing economy like ours, it will be difficult to achieve the desired economic growth and motivate indigenous entrepreneurs to create businesses since they will not be competitive with their foreign counterparts who obtain fund from their countries at single digit and invest in the Nigerian economy.

An industrialist and former NACCIMA president, Dr. Simon Chukwuemeka Okolo, added that government had better adopt fiscal and monetary policy management strategies that can lower the high interest rate and cost of funds to single digit regime. This he said would enable manufacturers across board to thrive and create the much needed jobs for our teeming unemployed graduates.

According to him, high interest rates beget high cost of funds, which have ushered in crippling industrial climate and factory closures across the country.

Okolo argued that unless the problem of high interest rate is tackled, the recently launched Nigerian Industrial Revolution Plan, NIRP, might fail to achieve its thrust like other such previous government ambitious plans.

The Lagos Chamber of Commerce and Industry, LCCI, amplified the OPS concerns, noting, “The credit situation is still a major problem for investors in the economy.”

“For the last couple of years, lending rate was well above 20 percent. As a result, many small businesses still have serious challenge in accessing credit even at this high rate. The tight credit situation is a major inhibiting factor to the capacity of domestic enterprises to the advantage of the robust Nigerian market,” said Muda Yusuf, Director General Lagos Chamber of Commerce and Industry.

“Credit challenges affect productivity and competitiveness. It also limits the capacity of small businesses to create job and retain existing ones. We reiterate our call for both fiscal and monetary authorities to work together to ease the credit conditions, especially for SMEs and more importantly domestic economy. This is critical as well as to stem the gradual crowding out of domestic entrepreneurs by foreign investors. This is also necessary to make the current growth trajectory more inclusive,” said LCCI.