With President Muhammadu Buhari said to be mulling a replica of Kenya’s newly signed law which regulates the interest rates that banks can charge on loans, analysts fret the move may exacerbate the economic crisis in Africa’s most populous nation.
“I hear he (Buhari) is holding informal consultations to ascertain the viability of capping commercial lending rates in Nigeria, and he is backed by his trusted allies,” an informed source said on condition of anonymity.
Experts tell BusinessDay that anti-liberal policies as such, may irk foreign capital which Nigeria’s Central Bank has courted for months now, after inflation touched a record 16.5 percent in June, stoked by imported inflation.
The CBN hiked its benchmark lending rates by 200 basis points to 14 percent from 12 percent, at its last meeting on July 25, to lure investors who had exited following a currency peg that lasted almost 16 months.
“Market participants, initially sceptical, have begun to come around. Even so, there are still worries. Would the reforms be sustained? These concerns are not unfounded. Last week, Nasir El-Rufai – an influential member of the inner circle of Nigeria’s president, Muhammadu Buhari, and governor of a state bordering the capital territory – hinted that the central bank’s independence may be attacked yet again,” wrote Rafiq Raji, a principal at MacroAfricaintel Investment Limited, an Africa-focused macro research and investment consultancy based in Lagos.
“This time, it could be ‘directed’ to cut interest rates, so to speak. His desire is for a law to be enacted giving the executive branch the legal power to do so… El-Rufai’s comments coincide with recent action by Kenyan lawmakers, who passed a law capping interest rates. Regardless, talk like this riles foreign investors. Not that it surprises them anymore,” Raji noted.
He added that “The policy would probably fail; in Kenya, in Nigeria and anywhere else. The way to get private banks to reduce interest rates is not to force them but to create the type of environment that makes them want to.”
Nasir El-Rufai, governor of Kaduna state, took to his twitter handle, on August 24, after Kenya’s president, Uhuru Kenyatta signed the law, saying “Warning to the bankers: Kenyan President signs into law, bill that caps bank interest rates,” he tweeted.
He added that “The policy would probably fail; in Kenya, in Nigeria and anywhere else. The way to get private banks to reduce interest rates is not to force them but to create the type of environment that makes them want to.”
Nasir El-Rufai, governor of Kaduna state, took to his twitter handle, on August 24, after Kenya’s president, Uhuru Kenyatta signed the law, saying “Warning to the bankers: Kenyan President signs into law, bill that caps bank interest rates,” he tweeted.
“I hope it is an empty threat that simply seeks to call banks to order as regards charging high interest rates,” an analyst said by phone, on condition of anonymity.
The weighted average prime and maximum lending rates of Nigerian banks rose by 1.05 percentage points and 1.06 percentage points to 17.82 percent and 27.93 percent, respectively, at the end of May, the latest CBN economic report reveals. While credit to the economy fell 0.8 percent to N18.1 trillion.
The weighted average prime and maximum lending rates of Nigerian banks rose by 1.05 percentage points and 1.06 percentage points to 17.82 percent and 27.93 percent, respectively, at the end of May, the latest CBN economic report reveals. While credit to the economy fell 0.8 percent to N18.1 trillion.
“If we want the private sector to access more capital than they are able to right now, then government could trim its benchmark lending rates and probably set up a special fund which lends to businesses at single digit rates,” says Taiwo Oyedele, head of regulatory services at consulting firm, PriceWaterhouse Coopers (PWC).
“We also need to resolve issues around credit rating so that it doesn’t cost an arm and a leg to borrow from the commercial banks.”
The Kenyan parliament passed a revised banking law requiring banks to cap interest rates at 4 percentage points above the Central Bank of Kenya’s (CBK) benchmark rate, currently 10.5 percent.
“We also need to resolve issues around credit rating so that it doesn’t cost an arm and a leg to borrow from the commercial banks.”
The Kenyan parliament passed a revised banking law requiring banks to cap interest rates at 4 percentage points above the Central Bank of Kenya’s (CBK) benchmark rate, currently 10.5 percent.
Kenyan authorities’ say it is in a bid to encourage borrowing, as high interest rates shave investors’ appetite for commercial loans.
Borrowers in Kenya were charged at softer rates of 21 percent before now.
Oyedele describes the move as “ridiculous and impracticable.”
So does Tajudeen Ibrahim, head of research at investment firm, Chapel Hill Denham, in response to BusinessDay questions.
“If there is a cap on interest rates in whatever form, particularly in an emerging market, it subdues the yield curve and that is negative,” Ibrahim said. “The forces of demand and supply should never be taken out of the fray in any market.”
Kenya’s Central Bank left its Central Bank Rate (CBR) steady at 10.50 percent, at its last meeting in July, “in order to anchor inflation expectations, and to maintain market stability,” the apex bank noted on its website.
Nigeria, on the other hand, raised its benchmark lending rate to 14 percent in July; after its Monetary Policy Committee (MPC) made clear that it was interested in curtailing inflation which accelerated to 16.5 percent in June, the highest in more than a decade.
Kenya has inflation where it wants it. At 6.4 percent, as at July, inflation rate remained within the government’s target range of 2.5 percent to 7.5 percent.
Borrowers in Kenya were charged at softer rates of 21 percent before now.
Oyedele describes the move as “ridiculous and impracticable.”
So does Tajudeen Ibrahim, head of research at investment firm, Chapel Hill Denham, in response to BusinessDay questions.
“If there is a cap on interest rates in whatever form, particularly in an emerging market, it subdues the yield curve and that is negative,” Ibrahim said. “The forces of demand and supply should never be taken out of the fray in any market.”
Kenya’s Central Bank left its Central Bank Rate (CBR) steady at 10.50 percent, at its last meeting in July, “in order to anchor inflation expectations, and to maintain market stability,” the apex bank noted on its website.
Nigeria, on the other hand, raised its benchmark lending rate to 14 percent in July; after its Monetary Policy Committee (MPC) made clear that it was interested in curtailing inflation which accelerated to 16.5 percent in June, the highest in more than a decade.
Kenya has inflation where it wants it. At 6.4 percent, as at July, inflation rate remained within the government’s target range of 2.5 percent to 7.5 percent.
LOLADE AKINMURELE
