Interest Rate: Nigerian Companies in Endless Search for Cheaper Funding Options
A growing number of Nigerian companies are in the debt capital market to seek out cheaper alternative to borrowing from banks amidst high interest rate environment.
The market has seen increased commercial papers issuance, while companies are registering their borrowing plans with market regulators as part of efforts to reduce the pressures associated with the associated burden of taking out loans with high interest rates.
To fight Nigeria’s ugly inflation, the monetary authority raised benchmark interest rate by 6% in 2024, despite weak growth trajectory in the past quarters. Local companies are facing tough time raising low-cost funding to drive productivity and growth.
According to analysts, growing numbers of companies have registered with regulators to issue commercial paper, which appears to be cheaper on the same duration with bank loans.
Apart from banks, most listed companies reported a surge in interest on loans in the first quarter of 2024, according to earnings release seen by MarketForces Africa.
In 2024, benchmark interest rate peaked at 24.75%. The fast changing market dynamics has also raised banks interest expenses on deposits liabilities. In the whole scenario, Nigerian banks are benefiting from high interest rate environment whether through old loans repricing and high rates on investment securities.
Nigeria’s previous policy triggered inflation surge. At the same time, there is unintended consequences from government economic reform activities and policies adjustment. Despite these, the International Monetary Fund projected 3.3% economic growth for 2024.
Private sector performance has remained unimpressive on account of low purchasing power and price instability that has persistent for a long time. Inflation hit 30 years high of 33.20% in March and by market consensus, consumer price is projected to worsen in April, 2024.
“The full impact of the policy rate hikes by the central bank will continue to be seen in the economy as borrowing costs trend higher while businesses seek alternative funding options in the local debt market through the issuance and raise of commercial papers for the short term in order to keep business operations afloat”. Cowry Asset Limited said in note.
Analysts think slow growth in total credit to government and private sector will continue, and businesses will explore further funding options amidst rising prices.
The federal government will continue exploring various funding options with lower debt servicing requirements just to meet its project funding and investment obligations, analysts said.
The latest credit extension data obtained from the website of the Central Bank of Nigeria (CBN) on total credit to the federal government as well as to the private sector shows a concerning growth of 12% in the total credit to the private sector to N71.21 trillion as at March 2024 from N63.6 trillion in the corresponding period of 2023.
Meanwhile the federal government has seen improved rise by 150.4% to N19.6 trillion from N9.4 trillion in the same period last year. The gradual growth could be attributed to the improved level of economic activity post-COVID, signaling economic recovery and increased demand for credit by major businesses despite the prevailing high interest rate environment.
The data also indicates an improvement and growth in the total banking system liquidity during the period, providing more lending opportunities for banks.
The CBN implemented various initiatives aimed at boosting credit delivery to the private sector, including the increase of the loan-to-deposit (LDR) policy and targeted intervention programmes for sectors like trade, agriculture and manufacturing.
On a monthly movement, the private sector experienced a decline of 11.9% month on month decrease in the total private sector credit to N71.2 trillion in March 2024 from N80.9 trillion in the preceding month amid the rising interest rate environment, spiralling inflation rate and foreign exchange volatility in the economy.
In the same manner, the total credit to the government tumbled by 42.3% month on month to N19.6 trillion from N33.9 trillion in the prior month.
On the average, credit to government printed at N25.7 trillion so far in 2024 as against N16.1 trillion in the comparable period. Credit to the private sector was at average of N72.8 trillion as against N61.9 trillion in the same period last year.
“This could be linked to the effect of the policy rate hikes by the monetary authority on the economy, where the CBN’s Monetary Policy Committee (MPC) has raised interest rate by 600 basis points to 24.75% so far in 2024 from 18.75% just to achieve price stability”. Cowry Asset Management said in an update.
Meanwhile, there has been an unprecedented growth in the total monetary aggregate, analysts said. Consequently, the money supply and broad money supply of the bank (M2 and M3) have soared by 69% and 66% year on year to N93.8 trillion in March 2024 and N94.6 trillion respectively.
However, these aggregates went on a slight southward movement month on month from N95.6 trillion (M3) and N93.9 trillion (M2) to the current levels as a result of the impact of the tightening measures . Naira Crashes after Foreign Payments Climb by 23%
