Reps’ tall order on lending rates

The House of Representatives is angry with Nigerian banks.  The house is worried that at the rate banks lend money to small and medium enterprises (SMEs), the arduous task of taming Nigeria’s 23.5 per cent unemployment rate is practically impossible. Banks lend to SMEs at anything from 30 per cent. The SMEs create more jobs than large corporate bodies.

Nigeria parades one of the highest lending rates in the Dark Continent.

The Central Bank of Nigeria (CBN) pegs the monetary policy rate (MPR), the rate at which it lends to deposit money banks (DMBs), at 13.5 per cent. Under normal circumstances, banks are expected to mark up their lending rates by about five percentage points above the MPR. That would automatically peg prime lending rate, the rate at which banks lend to their high net worth customers, at 18.5 per cent.  Ironically the lowest prime lending rate in Nigeria is 25 per cent. 

The House of Representatives has challenged the federal government to bring down not only the lending rates, but the cost of doing business.  The house rightly blamed Nigeria’s alarming unemployment rate on high cost of doing business.

Ironically, the House of Representatives and indeed, the entire National Assembly is partially responsible for Nigeria’s escalating cost of doing business.

Lending rate is just a fraction of the reasons for the high cost of doing business. The main reasons are high cost of governance, exchange rate of the naira, decaying infrastructure and the mounting insecurity in the country.

Nigeria’s high cost of governance has consumed the funds needed to rehabilitate decaying infrastructure. The eternal darkness that has enveloped Nigeria would remain for a pretty long time. Bad roads and comatose rail system escalate cost of doing business because manufacturers have to replace their delivery trucks every five years. 

The major reason why government cannot fix infrastructure is that the cost of governance in Nigeria is as high, if not higher than the cost of doing business. The cost of governance gulps almost 80 per cent of Nigeria’s annual budget.

Nigeria has one of the largest cabinets in the world. Each of the 43 ministers has a minimum of seven cars in his fleet. Each of them has scores of special advisers.

Nigeria’s civil service is outrageously unwieldy. Nigeria needs less than 40 per cent of the workers in its civil service to function effectively. But it has a large army of idle workers along with thousands of ghost workers and pensioners. 

Consequently, the federal government borrows a minimum of N60 billion monthly to pay its idle workers.  That explains why Nigeria’s debt burden has surged from less than N6 trillion in 2015 to N25 trillion at the moment.

The National Assembly is a huge burden on the nation’s coffers. A Nigerian senator earns more than America’s president. The monthly salary of a U.S. president is about $30, 000 (N9.15 million at the official exchange rate of N305 to the dollar). A Nigerian senator collects N13 million monthly as illegal overhead cost. That is besides his official salary and other perks of office.

Nigeria has one of the largest fleet of presidential jets in the world. In 2012 at an official exchange rate of N150 to the dollar, the sum of N18 billion was spent on maintenance of the planes in the presidential fleet. With the naira now trading at twice the exchange rate in 2012, the cost of maintaining the presidential fleet can only be imagined.

The House of Representatives has handed the CBN an impossible task by asking it to bring down lending rates without confronting the root of the problem. The truth is that high lending rates are detrimental to economic growth.  However, no one in the federal government or even the CBN can peg lending rates by fiat.

The House of Representatives did not mention what it considers an ideal lending rate. However, the house might be targeting single digit lending rates to stimulate economic growth.

That is practically impossible at the moment. With inflation rate heading for 12 per cent and MPR fixed at 13.5 per cent no one can talk about single digit lending rates in Nigeria. Banks factor the high cost of moving cash around Nigeria in the midst of armed robbers, bandits and kidnappers into their cost of funds.

Consequently, even if the CBN drops its MPR to single digit, lending rates would remain in high double digits because of the mounting insecurity in the land.

The CBN has crippled the medium of transaction that could reduce the cost of moving cash around the country.

Electronic banking which enables consumers to pay for goods and services through electronic transfers which amounts to merely debiting one account and crediting the other without the movement of physical cash, has been widely embraced in Nigeria.

The system was gathering momentum when the CBN shot it down by slamming a N50 stamp duty on point of sales (PoS) transactions above N1, 000. Public resistance to the levy has probably surprised its architects. Many have effectively returned to cash transactions rather than pay the N50 stamp duty.

The CBN is the prime loser. The apex bank spent N101 billion in printing currency notes between 2017 and 2018. With the introduction of stamp duty and the consequent return to cash transactions, that figure would rise by at least five per cent. Banks would spend more in moving cash around the country as security situation worsens. Consequently, lending rates would further head north as the high cost of moving cash is passed to fund users.

The House of Representatives can only get a single digit lending rate if its members are willing to forego their illegal monthly overhead cost of about N11 million each. That would set the pace for other cuts among civil servants and politicians in a bid to free funds for rehabilitation of decaying infrastructure and reduce the cost of doing business. 

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