Despite concerted efforts by regulators, led by the Central Bank of Nigeria (CBN), to restore domestic market confidence and inject new liquidity into the banking system, interest rates (measured by inter-bank, prime and maximum lending rates) have remained stubbornly ascendant, discloses Afrinvest in its 2010 outlook.

Notwithstanding these efforts, it stated that market participants appeared to have taken a cue from tighter global market credit conditions, with unsecured overnight inter-bank rates hovering around the 20.4 percent mark as at the end of June 2009.

“On the back of these rates, much of the credit pricing in the domestic market soared, with average prime lending rates rising to 19.1 percent.”

Afrinvest, however, said with the announcement of the initial results of the banking sector audit review in mid August, it became clear that significant counter party distrust was responsible for much of the risk premium between the Monetary Policy Rate (MPR) and the inter-bank rates.

Once this was addressed with clinical precision, the rates crashed to below 10.0 percent, hovering between 2.5 percent and 5.0 percent for much of Q4, 2009. It has however become much stable this year as banks shy away from lending to the real economy.

But this has also led to a split in the banking system by market participants, with those banks given the ‘all clear’ becoming the beneficiaries of a sudden flight to safety (a surge in deposits), while the ‘bad’ banks saw a systematic run on them.

In the run up to December 2009 deadline for the adoption of a common reporting year end by banks, we expected to see inter-bank rates gradually climbing on the back of increased drive for deposit mobilisation. This was however not to be as the periodic injection of FAAC allocation provided the needed liquidity to keep the rates within the single digit band, even as the market continued to experience wide fluctuations.

(Source:BusinessDay)