Journalism in the service of society

Small businesses borrowing at 150% higher than multinationals

THE cost of funds to small businesses and average Nigerians is about 140 per cent higher than the interest rate charged on money lent to multinationals as well as other prime borrowers, data sourced from the Central Bank of Nigeria (CBN) have revealed.

The cost of borrowing is a major component of the cost of running a business in Nigeria. As at August, the maximum lending rate (minus management fee and other sundry hand-ons) stood at 28 per cent, which was over 16 percentage points higher than the 11.62 per cent prime lending rate. 

The prime lending rate refers to the interest commercial banks charge on facilities held by customers with the highest credit rating. Ironically, prime lending has become a mere illusion as Nigeria’s previous banking crises were caused by the big-ticket borrowers classified as customers with high creditworthiness.   

The Asset Management Corporation of Nigeria (AMCON) had said 50 per cent of the N5 trillion bad debts under its management were owed by only 20 defaulters. During his tenure as Governor of the CBN, Mallam Lamido Sanusi had lamented that the huge non-performing loans (NPL) that led to his intervention were owed by a few Nigerians who alongside banks’ chief executives circumvented the rules.

The category of borrowers has continued to gain access to relatively cheaper credit while the majority considered as high-risk borrowers are denied access or offered cut-throat rates. 

From January till August, an average prime borrower paid 11.4 per cent interest rate as against 28.5 per cent non-prime borrowers are charged, stretching the average differential to as much as 150 per cent. The gap has widened exponentially over the years, from between seven to 10 per cent in 2006 to around 40 per cent in 2011. 

The data suggest that the prime lending rate has decelerated in the past years, though with some inconsistency, while non-prime lending increased. For instance, in 2006 prime and non-prime lending costs were around 17 and 18 per cent respectively. 

In 2011, the former fell to about 16 per cent while the latter rose to about 22 per cent. Last year, non-prime maximum lending surpassed the 30 per cent ceiling whereas prime lending was about 14 per cent.

The Monetary Policy Rate (MPR), the benchmark of commercial lending cost, is currently 11.5 per cent, implying that the banks discount the cost of lending to their prime borrower while other customers pay premiums to access credits for productive activities. 

Data also suggest a wide discrepancy between deposit and interest rates. Last month, for instance, the 12-month deposit rate was 6.73 per cent while the six-month deposit rate was 5.3 per cent. Three-month and one-month deposit rates were 4.8 per cent and 3.8 per cent respectively. 

Also, the annualised savings deposit rate was only 1.82 per cent. And depositors would forfeit interests if they exceed four withdrawals in a month. The huge differential between deposit rate and cost of borrowing underscores the exploitative tendencies of the commercial banks, a historical challenge with untoward implications for the country’s economic development. 

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