Tier-2 Banks Take the Lead in Lending as Maximum Lending Hits 29.13% in 2022

Tier-2 banks operating in Nigeria kept their high lending rates to consumers in the year under review, despite the increase in the maximum lending rate to 29.13 percent in 2022.

According to the Central Bank of Nigeria’s (CBN) most recent data on bank deposit and lending interest rates, the Monetary Policy Rate (MPR) increased to 16.5 percent in 2022, making the average maximum lending in December 2022, which was 27.58 percent in December 2021, the second highest in 2022.

In February 2022, the average maximum loan rate reached 30.73 percent, which was a record high for the year under consideration.

In order to protect their operating costs and profits from the effects of rising inflation, Tier-2 banks raised their interest rate margins last year. For 2022, the average maximum lending rate will be 29.13%.

The maximum lending rate is the average of the top lending rates levied by Nigerian deposit money institutions.

The Monetary Policy Committee (MPC) of the CBN raised the MPR for the fourth time in the year under review, which caused most Tier-2 banks to change the interest rates on consumer loans.

For instance, First City Monument Bank’s (FCMBprime)  lending rate, which is 19.50%, and its general business maximum loan rate, which is 42.0% between January and November 2022, are both unchanged.

Stanbic IBTC was closely behind FCMB with a general maximum lending rate of 36% as of November 18, 2022, down from 39% as of December 31, 2021.

Additionally, as of November 18, 2022, Keystone Bank Limited had a general maximum lending rate of around 36%, down from December 31, 2021’s rate of 41%.

On the other hand, most Tier-1 banks reported small general business maximum termination rates for the year in question.

With a general business maximum loan rate of roughly 30% and the same rate in 2021, Zenith Bank closed on November 18, 2022.

Similar to this, the average prime loan rate increased by 2.17 percentage points from December 2021 to December 2022, reaching 13.85 percent.

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The term “prime lending rate” refers to the typical lending rate that most deposit money banks in Nigeria charge to certain of their most favored clients.

When the MPC voted to raise the MPR from 15.5 to 16.5 percent in October, the average prime lending rate was 13.17%.

Today’s research also showed that Heritage Bank, followed by Unity Bank Plc, has one of the highest prime lending rates in the banking industry as of November 18, 2022.

Heritage Bank had a general business prime lending rate of 27% during the time period, while Unity Bank had a general prime lending rate of 26%.

As of November 18, 2022, Wema Bank Plc and Providus Bank both have general business prime lending rates of 25%; however, Stanbic IBTC Bank has the lowest rate in the banking industry with a general business prime lending rate of 7%.

Further research found that the prime lending rate is lower at Tier-1 banks.

During the time period under consideration, the general business prime lending rate at Guaranty Trust Bank (GTBank) was 10%.

The data also reveals that the average interest rate on a one-month deposit increased from 3.73 percent in December 2021 to 8.15 percent in December 2022, a 4.42 percentage point increase, and that the average interest rate on a three-month deposit increased from 4.94 percent in December 2021 to 8.79 percent in 2022, a 3.85 percentage point increase.

The average interest rate on 12-month deposits increased by 3.86 percentage points to 8.68% in December from 6.79% in December 2021, representing the biggest fall in deposit rates.

The change, which shows an overall increase in banks’ average maximum lending rates and 12-month deposit rates, resulted in a 15.28% year-to-date (YTD) increase in interest margin.

Analysts have linked the rise in MPR and the significant macroeconomic difficulties in the year under review to the rise in the interest margin.

The difference between the maximum lending and deposit rates has grown over time, especially after 2009, exceeding a difference of 10% in most cases.

Large companies in Nigeria that have a history of steady cash flows and are thought to be less risky get prime lending rates, while small businesses and individuals who are thought to be more risky usually have to pay more than the prime lending rate margin to borrow money.

The Head of Financial Institutions Ratings at Agusto & Co., Mr. Ayokunle Olubunmi, commented on the development by stating that the average maximum lending rate in 2022 was affected by the MPR’s progressive climb.

He stated that the hike will undoubtedly have an impact on businesses and will most likely result in lower borrowing rates in the banking industry.

“Businesses that have taken loans will be paying more interest on these loans, which will have an impact on their profitability,” he said. Additionally, because of the increase in interest rates, any companies or individuals who were considering borrowing money may think twice.

“The increase in MPR by the CBN is a contractionary monetary policy,” he continued. By reducing the number of people who take out new loans and the amount of money in circulation, the action is intended to lower inflation.

From a different point of view, Mr. David Adnori, Vice President of Highcap Securities Limited, said that the difference between the CBN’s lending rate and the maximum lending should worry the banking industry.

The difference between the MPR and average maximum loan rate has nearly doubled, and Adnori claims that this is evidence of major rant-seeking within the industry. When the difference between the average maximum loan rate and the MPR exceeds 10%, there is substantial rent-seeking going on in the banking industry, which is harming business operations.

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In response, Dr. Uju Ogubunka, President of the Bank Customers Association of Nigeria (BCAN), attributed the rise in the average maximum lending rate to the economic environment’s inflation rate and political unrest.

Ogubunka emphasized that the increase in prime lending is expected to have an effect on the cost of doing business in the country and that Nigeria’s economy has not improved enough in 2022 to justify an increase in bank lending rates to the real sector.

“As expected, average lending rates have gone up between June and October 2022,” said Aishah Ahmad, Deputy Governor, Financial System Stability, CBN, in her personal statement at the November 2022 MPC. “This is partly because of the MPC’s tight monetary policy stance, which requires banks to be extra careful to avoid defaults and keep asset quality high.”

In addition, recent bank initiatives like the redesign of the naira are anticipated to improve the transmission of monetary policy through the banking sector. ” Sustained execution of the policy on GSI and good credit risk management strategies by the banks are important in that regard.

“The Bank must stay alert and proactively manage operational, asset quality, and other risks to the stability of the financial system,” the bank said. “This is especially true given the bad state of the global economy and despite the strong fundamentals of the financial system and the excellent results of the stress tests.”