08 September 2010
Banking is an interesting business. The fact that banks are empowered to collect money from the public and also disburse such funds to the needy areas with interest makes banking an interesting business.
It is expected that for funds kept by banks on behalf of individual, some amount is paid as interest while banks similarly is expected to charge some amount as interest for funds they lend to individuals or cooperate entities.
Also, another expectation in that, the gap between the interest chargeable on loans and the interest payable by banks on funds kept in their care should not be much.
However, currently in Nigeria, that is not the case, because for amount kept in banks, the highest interest rate is three per cent annually while banks can charge as high as 18 per cent or loan.
Temi Ariyo, a financial analysis told The Guardian that it was sad that the nation’s economy in a bad shape leading to all those abnormalities.
He pointed out that the gap between the deposit rate and lending rates was too high because of the limited outlets for banks to invest in and keeping funds for keeping sake was not beneficial to the banks.
So, the only way most of them could break even was to charge high interest on loans.
Baring his mind on the issue, Dr. Samuel Nzekwe, immediate past President, Association of National Accountants of Nigeria (ANAN) had this to says: “The yawning gap between lending rate and interest paid on deposits is unhealthy, and I think that the long run effect will not be good for the economy. Currently, the banks lending rate stand between 18 per cent and 28 per cent while rates paid on deposit by banks stand between two per cent and three per cent. This is completely abnormal and I continue to wonder why the CBN has allowed this dangerous disequilibrium to continue unabated as the economy will be hurt in the long run.
“If we look at supply side of the funds, the banks are paying interest of between two per cent and three per cent on deposit at the face of rising inflation which is currently standing above 11 per cent. In the circumstance, therefore, inflow of funds into the financial system through savings by individuals and institutions would be frustrated. This is because the return on investment (two per cent to three per cent) is lower than the rate of inflation (11 per cent and above) and the real income or earnings received from such investment(deposits) is technically negative. The implication of this situation is that the banks would be illiquid because of the scarcity of loanable funds and as such would not be able to play their financial intermediation role of collecting funds from surplus unit and lending to the deficit unit. What is happening currently is that people are not interested in saving money in banks because of the low interest receivable on savings, they would rather look for alternative investments where they could earn higher returns. At the same time, most investors are not ready to approach banks for loanable funds due to high lending rates and if this situation continues unchecked, the economy would be stunted in the long run…
“If you look at the demand side of funds, you will see that the situation in the supply side is repeating itself. The lending rate is currently between 18 per cent and 28 per cent and this is also abnormal because no investor can borrow and make profit when cost of capital is very high. The ideal thing the CBN would have done was to reduce the lending rate to about 10 per cent since interest payable on deposit was reduced from 14 per cent to between two per cent and three per cent. The gap between lending rate and interest paid on deposit is unnecessarily too high and should be closed to create healthy monetary environment.
“The yawning gap is causing disequilibrium in the functions of rate of interest in the economy. The rate of interest performs several important functions in the economy. It is an important tool of government to guarantee volume of savings which will flow into investments and promote economic growth. If the economy is growing too slowly and unemployment is rising very high as we have in Nigeria today, the government can use its monetary policy to lower lending rates in order to stimulate borrowing and investments. This will in turn, create employment, guarantee economic development and improve our GDP etc.
“The situation in Nigeria calls for serious review, because how can CBN allow a situation where savings are discouraged through very low interest rate payable on savings and at the same time discouraged borrowing through high lending rate. The ultimate result from the above scenario would be economic stagnation because the economy will be operating on a cash and carry basis.
“The government definitely has a very big role to play in this regard in order to move the economy forward. It is right time that the government put in place necessary mechanism so as to stimulate provision of adequate electricity, infrastructure including roads, security, education etc, because banks spend huge sum of money financing the above costs. Perhaps, this is why the CBN allowed this gap as a palliative measure for the banks, to exist unabated.”
Also the apex bank had stated that in line with the CBN policy to ensure that transparency and accountability
are entrenched in the banking sector, banks are henceforth required to submit on weekly basis to the CBN their average deposit and lending rates in line with their previous circulars numbers BSD/DIR/GEN/CIR/02/019 dated January 29, 2009 and BSD/DIR/GEN/CIR/01/023 dated October 14, 2009.
The CBN shall publish the rates on Wednesday of every week in some of the National dailies and post same on its website to enable the public and other relevant stakeholders monitor the actual lending and deposit rates of banks.
In line with the current practice, banks should continue to publish their interest rates on their websites.
Also, going forward the CBN will, in addition to undertaking spot checks on banks to verify the accuracy of the rates being published, carry out direct third party confirmation from the users of these funds as the need arises.
Any bank that is found to have rendered inaccurate interest rate returns capable of misinforming and misleading the public shall be sanctioned; sanctions will be publicised by the CBN.
Consequently, banks are directed to submit their weekly average interest rates returns as per the attached format before the close of business of every Monday following the preceding week.
In addition, soft copies should be sent to BSDReturns@cenbank.org and the hard copies forwarded thereafter to the Director, Banking Supervision Department.