Some economists have expressed concerns about Nigerian banks’ large net interest margin, alluding to the trend as making access to finance beyond the reach of small businesses.
Net interest margin is the difference between the lending rate and the deposit rate. The lending rate is the rate charged by banks on loans to the private sector and the deposit interest rate is the rate offered by commercial banks on three-month deposits.
Speaking, the chief executive of the Center for the Promotion of Private Enterprise, Dr. Muda Yusuf, noted that the spread between deposits and lending rates are sometimes as high as 20%, which is one of the highest globally.
He also said the tenure of funds in the banking system is extremely short. “Over 80% of funds are of one year tenure or less, which explains the high level of assets and liability tenure mismatch in the banking system,” he said.
According to the World Bank, interest rate spread data were reported at 8.027 % per annum in 2017. This decreased from the previous number of 9.370 % per annum for 2016. Hence, within the last seven years, the interest rate spread has leaped to 20%, and probably counting among Nigerian banks.
A financial economist at CashLinks, Dr. Francis Akpochafor affirmed the trend. He stated that for borrowers, particularly individuals and small businesses, a high spread between deposit and lending rates translates into elevated borrowing costs.
He added that as banks charge higher interest rates on loans relative to the rates they offer on deposits, borrowers face increased financial burdens when seeking credit for investment, consumption, or working capital purposes.
Henry Mamfe, a retired lecturer of financial economics at University of Buea in Cameroon, said a high spread between deposit and lending rates can dampen consumer spending and investment, leading to sluggish economic growth and reduced productivity.
He cited that when borrowing costs are prohibitively high, consumers may curtail discretionary spending, postpone major purchases, or forego investment opportunities, dampening aggregate demand and slowing down economic activity.
He further stated that a wide gap between deposit and lending rates can undermine the effectiveness of monetary policy tools and central bank interventions aimed at stimulating economic activity and managing inflation.
He said when banks maintain high lending rates relative to deposit rates, the transmission mechanism of monetary policy becomes less effective as changes in policy rates may not translate into corresponding adjustments in borrowing costs for consumers and businesses.
This can complicate the central bank’s efforts to regulate money supply, control inflation, and stabilize the economy.
Dr. David Nkwo a financial economist at Ebonyi State University, on his part, said a high spread between deposit and lending rates can erode consumer confidence in the banking system and undermine trust in financial institutions.