Their interest income will rise further – CBN
They may not implement higher savings rate – Banks customers
By Elizabeth Adegbesan
Banks are expected to raise their interest rates on loans starting this week, barely a week after the Central Bank of Nigeria, CBN, effected a hike in the Monetary Policy Rate, MPR.
The MPR is the interest rate set by the CBN upon which all other rates especially lending, in the financial market are based with significant mark ups.
The apex bank, last Tuesday, increased the benchmark MPR from 14 percent to 15.5 percent, the third time in four months, in its quest to tame inflation.
A senior bank executive who spoke to Vanguard Money Digest on condition of anonymity said there was nothing holding the banks from increasing their lending rates immediately as the CBN has already started applying the new rate.
According to him most banks, including his own bank, will start sending out letters to their borrowing customers this week advising them of the new rates.
He declined to give the specific rates the banks are likely to charge as he explained that the rates will differ among banks and according to the different credit categories.
He also declined to indicate the deposit rates that would apply in line with the new rate regime.
Both the Central Bank of Nigeria, CBN, and the leadership of the organized banking services customers, the Bank Customers Association Of Nigeria, BCAN, have hinted that the general banking public, specifically, the depositors and borrowers, would be negatively affected by the recent hike in the interest rates.
The CBN has confirmed that banks are expected to raise their interest rates on borrowings due to the raise in MPR.
Speaking at a post-Monetary Policy Committee meeting on Zoom with Journalist, the Director Banking Supervision Department, CBN, Mr. Haruna Mustapha, said: “In terms of the impact on bank loans and incomes, clearly, it will have an impact but it is going to be a bitter-sweet experience.
“One, by the rate hike, banks will re-price their loans. So you will expect to see interest rates on bank loans go up. Of course because this is their traditional function, you will expect a salutary impact on their bottom line.
“Second, obligors, customers will be at the other end, they will take the brunt given that the cost of borrowing will go up and obligors will not be happy’’.
Mustapher, however, opined that the overall objective is in the interest of the economy.
He stated: “But ultimately what we are expecting to see is to rein in inflation and the banking system is a veritable channel for the transmission of monetary policy and like I said, banks will get more income in terms of interest income and indeed based on the numbers that we shared at yesterday’s meeting interest income have continued to go up for understandable reasons and this will have a positive impact on banks bottom line.
“Also interest on government securities and so on will also go up which will also add to banks non- interest income which is also another income line.”
He mentioned that the interest rates on savings account will also be increased from 10 percent of MPR to 30 percent of MPR as from September this year.
“Yes we increased it from 10 percent to 30 percent of MPR and it stands to reason that with the hike in MPR to 15.5 percent that will also change.
“But to your question, the effective date of that directive is September. The first circular that was issued was August but was later changed to September.
“So we expect to see banks fully complying and our examiners, as part of our routine examinations on banks will check to ensure that all banks comply’’.
Explaining some of the reasons behind the MPC decisions, Director, CBN’s Monetary Policy Department, MPD, Dr. Hassan Mahmoud, said that the aim was to mop up the excess cash in the system as this was the cause of price increases in the economy.
“What we are seeing here is that the quantity of money within the system was too much for the economy to absorb in terms of the flow of supply.
“So those huge money within the system will either impact on inflation. People say there is too much money chasing few goods, that means that the prices will go up just because of the volume of money within the system or it will also go to demand pressure on our foreign exchange resources. And as the naira depreciates inflation rises’’.
Bank customers are skeptical
Commenting on the development, the President, Bank Customers Association of Nigeria, BCAN, Dr. Uju Ogubunka, commended the decisions of the MPC to raise interest rates on savings deposits noting that it would revive savings culture in the country.
He, however, expressed concern on the effectiveness of banks implementation of such interest rates on customers’ deposits in savings accounts.
Ogubunka said: “That is a bonus for everybody that has a savings account. The CBN is trying to mop up the too much cash in the economy by encouraging people to save more and borrow less. This would also boost the savings culture. That is why it is using those two factors as a tool.
“However, the raise in MPR will result in banks increasing their interest rates on loans and this will make most customers shy away from borrowing especially when it is meant to meet needs not meant for production, and also when they see that they will not be able to meet up with paying the principal on time.
“If I have money now, I will put it in the bank because I don’t know what else I will do rather than save money and make 30 percent of MPR.
“Even the banks were not paying the 10 percent of MPR. So how am I sure they are going to pay the 30 percent of MPR if I have N1 million in my account.
“In fact most banks don’t encourage you to save in your savings account; they prefer you credit your current account. That is the problem.
“If they are sure that the banks will implement it then some bank customers that have surplus money lying here and there will save it in the banks and make 30 percent interest of MPR on it.”
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