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The Nigerian high-interest-rate trap 07 May 2025

The recent issuance of N194 billion worth of commercial papers (CPs) by Access Bank, offering an effective yield of 19.4 percent for a 180-day maturity, was greeted with speculations about a dire liquidity need of the bank. Bankers are rational strategists. Therefore, Access Bank would not have issued the high-cost instrument if it didn’t need the short-term liquidity it would provide. Nevertheless, the bank remains a strong financial institution, one that is well capitalised, geographically diverse with its operations across African countries and other regions of the world, and one of the largest in total assets in the Nigerian banking industry.

But the view that banks should ordinarily not be mobilising funding at such a high interest rate is quite fascinating. It suggests that they are entitled to mobilising deposits at cheap costs – like as low as 5 percent interest rate they pay for fixed deposits. Meanwhile, bank lending rate is as high as 35 percent. The gap between these rates should raise eyebrows. Moreover, high interest rates charged by the banks have been strangulating business borrowers, especially SMEs.

There are tell-tale signs indicating the price of money in Nigeria is not sustainable. For instance, prospective depositors are no longer keen to put their money in low-yielding instruments of the banks. In the face of persistent high inflation rate, which was at 24.2 percent in March 2025, many depositors are looking for high-yield investment opportunities. Unfortunately, thousands of such investors hunting for higher yields have just lost a whopping N1.3 trillion in CBEX, which turned out to be a Ponzi scheme. That the scheme was able to mobilise this amount of money within a few months of its operation in the country speaks volumes, not only of the desperation of the investors but also of cynicism about the banking system.

The banks themselves are not immune to the repercussions of their high lending rates. Due to high levels of defaults on their even more costly quick loans, many of the banks have had to pause lending under the products they had recently developed to compete with the fintechs, whose loan apps are disrupting the traditional businesses of the commercial banks. Defaults on the traditional consumer and business loans of the banks have contributed to loan losses in an acutely stressed economic environment.

Yet, the banking regulator, the Central Bank of Nigeria (CBN), is a trendsetter in the high-interest-rate environment. At the February 2025 meeting of its Monetary Policy Committee, the Monetary Policy Rate (MPR) was retained at 27.5 percent. Although the MPR is primarily used to control inflation, it is also the rate at which the Central Bank lends to commercial banks. And since the MPR is a “reference” or “anchor” interest rate, the banks factor it into the pricing of their loans to borrowers. Therefore, as long as the MPR remains atmospherically high, bank lending rates would be stratospherically high.

The CBN further exacerbates high lending rates through its Cash Reserve Ratio (CRR), which currently stands at 50 percent. In contrast, the European Central Bank has maintained a minimum reserve ratio for the EU banks at 1 percent since January 2012. In Nigeria’s case, banks have to keep half the deposits they mobilise with the CBN while trading with the remaining half – which, in effect, means the actual average cost of the deposits is twice their original number.

While the CBN’s monetary policy measures are intended to promote the safety of the financial system, their ineffectiveness or the economic and business risks they pose should not be overlooked. In theory, the MPR has over the past years been set at high levels in order to bring down inflation. But as earlier stated, inflation has been obdurately high in Nigeria, indicating the MPR is a blunt tool for fighting it. This is an anomaly, and it is context specific. It is brought about by the many causes of inflation in the country, of which wasteful fiscal deficits are chief.

There is also the lack of cost reduction opportunities for businesses through the availability of shared public goods, such as stable grid electricity, adequate infrastructure, and security. The CBN also uses the MPR to pursue other short-term objectives such as making government bonds attractive to foreign investors, thereby increasing accretion to its foreign reserves – which has a beneficial effect of stabilising the exchange rate. Nevertheless, when all of these are taken together, high policy interest rate will continue to contribute to exactly the problem it is supposed to prevent, which is high inflation, at the cost of the CBN’s credibility.

One of the signs of the disjointedness of policymaking in Nigeria is that while the government wants to reduce the cost of doing business, the CBN is unremitting in justifying high interest rate. Solving the country’s high interest rate cum high inflation will begin with fiscal discipline. Without fiscal discipline, the “coordination of fiscal and monetary policy”, which has been bandied about in policy corridors, will remain a meaningless cliché. And because of that, the government itself will also continue to suffer reputational damage, for being unable to improve the welfare of the citizens, which is eroded by high inflation rate.

The subsisting high cost of money in Nigeria is harmful to all stakeholders. It cannot bring about sustainable economic progress and should be addressed with effective solutions.

Jide Akintunde, Managing Editor of Financial Nigeria publications, is Director of Nigeria Development and Finance Forum.