High Borrowing Cost to Stifle Growth – Analysts
Godwin Emefiele, CBN Gov

High Borrowing Cost to Stifle Growth – Analysts

Borrowing rates from Nigerian banks have inched upward, reflecting the monetary authority’s hawkish fist on key policy rates in a bid to fight running inflation.

The steep increase in loan costs is projected to have overwhelming negative impacts on productivity, job creation, and expansion, analysts told MarketForces Africa.

The trend continues to pressure corporate earnings performance, resulting in margin decline despite increasing prices of goods and services to a level that supports competition.

The monetary policy authority sustained rate tightening has started to impact production costs, detail from listed companies’ results indicate.

Some local lenders have started pushing higher lending rates in line with changing money dynamics for loan offers to companies despite macroeconomic uncertainties.

MarketForces Africa’s investigation of listed companies’ earnings indicates that despite price increases that culminated from a steep jump in average production costs across industries, operators lamented negative impacts on profitability.

Speaking at MarketForces Africa, a community of analysts in attendance agreed that the lending rate has increased as local deposit money banks’ (DMBs) funding costs and risks continue to rise.

Money market indicators published by the Central Bank of Nigeria show that banks’ maximum lending rate rose to 28.59% in April, from 28.08% in March amidst policy rate hikes.

Meanwhile, the prime rate for corporate customers with top-notch ratings surged to 14.85% in April from 13.97% in the previous month, the apex bank publication showed.

“Borrowing rate within 30-40% could put pressure on corporate financing, and then stifle economic growth”, according to a consensus formed by investment analysts.

MarketForces Africa gathered from some business owners that some local lenders are comfortably charging above that except for bellwethers that have strong financial muscles and negotiation advantages.

Phoenix Management Consulting founder, Fisayo Tunde, told MarketForces Africa starting since the apex bank switched to monetary tightening in May, lending rate to small and medium scale has increased.

“On the average, Nigerian banks presumption is that small and medium scale clients have more than 60% risk of default…then, if at all they are going to support the business, you will be paying near 40% interest rate on borrowing”, Tunde said.

In a CBN publication, Access Bank pegged the maximum lending rate obtainable in all deposit money banks at 28.50% in the first quarter of the financial year 2023.  Meanwhile, it capped the prime lending rate at 16%.

Citi Bank was much softer than Access Bank in its rate pricing, according to the publication. Citi pegged the maximum lending rate across sectors at 22.50%, and prime lending rate at 15.5%.

In the first quarter of 2023 gross domestic product report, the slowdown in the industrial economic performance was attributed to a spike in the lending rates from banks.

For Nigerian businesses, the surge translates to high finance costs, which, in addition to other operating expenses continue to be a drag on earnings.

Irrespective of macroeconomic temperature, the CBN has maintained its stance that local lenders must give out 65% of their deposits as loans.

However, investment banking analysts said banks still guide their loan appetites jealously and preferred to be debited, knowing that the fund will be released later.

For the month of February, Access Bank Plc’s prime lending rate to Agriculture, Forestry, and Fishery segment was 16%, and a maximum lending rate closed the month at 28%. In the same sector, Heritage Bank sets its lending rate at 35% as prime rate for special customers was 27%.

FCMB Plc’s prime lending rate to its selective customers was 17.50% in the month with maximum rate reaching the end of the interest rate line at 42% for clients in general segment. On average, the bank’s maximum lending rate was 32.5%.

Other tier-2 lenders exhibit similar loan pricing patterns. Fidelity Bank Plc did 22% as its prime rate; with the maximum lending at 24%, according to the CBN publication.

Union Bank Plc rates appear quite mixed as lending rates varied across sectors, capped at 33% and a prime rate range between 19% to 25%.

At 7%, FBN Quest Merchant Bank’s prime rate for manufacturers was the lowest in February 2023. On the other hand, Heritage Bank’s prime rate for the sector was 27% while the maximum lending rate was 35%.

Rates cards for local lenders depend on funding profile, analysts said, saying some banks have large deposits base with very low costs of funds.

Tier -2 banks’ rates are priced in accordance with funding sources, usually more of term deposits and borrowings – which are more expensive than savings, and current account (CASA) mix.

Indicating a budding pressure, the manufacturing sector’s real contribution to GDP in the first quarter of 2023 was 10.13%, lower than the 10.20% recorded in the first quarter of 2022 and higher than the 8.40% recorded in the fourth quarter of 2022

Surprisingly, merchant bankers have lower borrowing rate figures, according to the CBN publication.

Greenwich, Rand, FSDH, Coronation, and Nova Merchant Bank’s maximum lending rate range between 20% to 25% with as low as 12% prime rate for A-rated clients.

 “The smaller the bank, the lesser the funds available to disburse to creating money due to applied cash reserve ratio. The ratio curtails the bank from creating risk assets beyond their maximum capacity.

“That is, the advantage that big balance sheet banks are having. For merchant banks, they have some flexibility in building funds that can be channeled to customers”, investment banking experts said in response to MarketForces Africa’s comment.

Due to uncertainties, and weak repayment history among other considerations, not so many businesses have the opportunity to raise credit at the prime rate.

More than often, the blue chips and high-ticket deals have the rare advantage. Analysts said big balance sheet companies that have access to credit at prime rate are not often pressured by finance costs.

They have grown up enough to accommodate interest expenses that would have a lesser effect on profitability due to the size of their revenues and margin.

Ecobank Plc offered 14% as its lowest prime rate and cap it at 30% maximum, First Bank of Nigeria capped its maximum lending rates at 28%. #High Borrowing Cost to Stifle Growth – Analysts

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