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Commercial bank lending rates – to which millions of small businesses in Africa’s largest economy are exposed- isn’t letting up to the extent at which yields on domestic government bonds and Treasury bills have over the past one year.
A change of tack by the Federal government- wherein cheaper dollar denominated loans are making way for expensive domestic loans- has cut government debt supply and sent yields to as low as 12 percent this year from some 22 percent in 2017.
The new tack is helping the federal government manage ballooning domestic debt servicing costs, while it is tipped to free up bank credit to the private sector and help companies raise debt capital at a lesser rate through commercial papers.
For a large corporate or a publicly listed company, perhaps bank credit will flow better and debt capital can be raised at a lower rate.
Small businesses outside of those two categories are not as optimistic of raising capital at cheaper rates and may rightly feel hard done by.
A risk-laden business environment has made commercial banks hesitant to extend credit to small businesses most of which have no formal structures and tested corporate governance structure.
Average bank lending rates stood at 25 percent as at end March 28, 2018 according to data collated by the Lagos-based economic advisory and research firm, Financial Derivatives Company.
There is a wider disparity when large and less risky borrowers are separated from the smaller and riskier ones which is evident in the movement between prime lending rates (enjoyed by large corporates) and maximum lending rates (paid by smaller businesses).
Average prime lending rate was 17.78 percent as at end December 2017, while average maximum lending rate was over 30 percent, according to the latest report by the Central bank.
“In Nigeria, interest rates on loans tend to be downward sticky as the tendency among banks is to delay repricing loans relative to the speed with which deposits are repriced,” said Wale Okunrinboye, a fixed income expert.
“The prospects of lower interest rate on loans following dovish switches in monetary policy tends to be domiciled with large corporate borrowers who, account for 70 percent on average of banking loans, and possess stronger bargaining power relative to small business and individuals,” Okunrinboye observed.
Prime lending rates are likely to be flexible while maximum lending rates tend to remain stubbornly and rigidly high.
Though some Tier I banks are likely to reprice loans quickly to attract good quality corporates and boost loan growth to deal with the lower asset yields, “banks with softer capital buffers will want to delay downward adjustments to cope with the softer rate environment,” Okunrinboye said in an emailed response to questions.
At the heart of the problem is the limited source of funds in Nigeria.
Fixing the problem, according to Okunrinboye, would require deepening the bond market to allow good quality corporates borrow directly from debt markets so that banks are free to take more risk with smaller businesses as with elsewhere.
“Though this is slowly improving, it will take some time,” Okunrinboye said.
High interest rates (60.2points) was second only to insufficient power supply (69.6points), as the major factors that constrained business activity in April 2018, according to the Central Bank’s Business Expectation survey.
A five-year trend analysis shows that not much has changed since businesses then cited high interest rates on bank loans as a pain in the neck.
The respondent firms to the CBN survey also expect borrowing rates to rise in the current month.
However, they expect rates to fall next month.
Though the reason for the optimism next month was not given, Bismarck Rewane, the chief executive officer of FDC said falling bond and treasury yields would eventually translate to lower borrowing costs for small businesses.
“There is a lag between when it does happen, but it will,” Rewane said.
Bank credit to the private sector rose at the slowest pace in five years in 2017, as banks poured cash into high-yielding government securities as appetite waned for private sector credit amid a scathing economic recession and naira devaluation that crimped company profit and sparked a rise in non-performing loans.
Now that yields on government securities are a short crawl away from single digits, government officials expect it will lead to increased credit to the private sector which has been crowded out by government borrowing in the last two years.
Declining yields would however fall short of the expected impact on credit extension to the private sector if the government doesn’t take steps to de-risk the real sector by improving infrastructure and liberalising sectors that are hampered by non-market policies.
“At 12 percent, the banks will rather lend to government than to the real sector at 30 percent, if they are not sure they will get their money back,” said Ayodeji Ebo, managing director at investment firm, Afrinvest Securities Ltd.
“Government must improve the ease of doing business, invest in infrastructure from roads to power and be more consistent with its policies.
“It is the only way small businesses can access credit from the banks at cheaper rates,” Ebo added.
There were some 37 million SMEs in Nigeria as at 2015, according to the National Bureau of Statistics (NBS) data.
LOLADE AKINMURELE
