A big one: “The Central Bank of Nigeria (CBN) has revealed a notable reduction in loans extended to the private sector, with credit dropping to N71.21 trillion in March. This figure reflects a significant month-on-month decline of 11.93 percent or N9.65 trillion compared to February’s record of N80.86 trillion.”
Let me defend banks here: they did not reduce their efforts to give loans to companies. What happened was many companies did not want to take loans due to the high interest rates, anchored on the prime rate which was set by the apex bank.
In our portfolio companies, three of our companies which were approached by a bank to give them credits, rejected the offers, because of the high interest rates (and nonsensical collaterals). The companies could not model how they could pay the rates while advancing their missions.
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Good People, our high interest rates are partly driven by the Central Bank of Nigeria. If Nigeria’s prime lending rate is about 15% (see here), the least any bank could offer loans is at about 21% (unless the fund is coming from a development finance institution like AfDB). [A bank will add insurance, operation cost, profits, etc, and when all is done, you have at least a 23% interest rate for customers].
So, with lesser funds going into companies, production will drop, and if that happens, Supply of goods and services will drop to the market. When supply drops, and demand remains the same, ceteris paribus, price goes up. Hence, CBN’s mission to tame inflation will struggle since it is reducing Supply via its monetary policy which has negligible impacts on Demand, especially at the consumer side since few customers get credits in Nigeria. This is why Nigeria has struggled to achieve any positive inflation control for years! We must try new ideas!
One of those ideas could be to offer rebates to companies thereby making sure only companies doing productive things will see their interest rates reduced. That way, you do not reduce rates to scale consumption.
Banks’ loans to the private sector dropped by nearly N10tn in March – Central Bank of Nigeria (CBN)
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