High Interest Rates Cripple Small Businesses as Banks Face Liquidity Crunch

The future looks very bleak for businesses, particularly small enterprises in Nigeria as banks face serious liquidity crisis in the country. The result is the increasing interest rates which has taken funds far out of the reach of small businesses.
Although it is difficult to ascertain actual normal interest rates banks charge its customers, the movement in inter-bank rate often mirrors the level of change in interest rates.
For instance, as at the end of June, call rate stood in the neighbourhood of 6.75 per cent, while Open Buy Back (OBB) rates stood at 7.25 per cent.
The rates, in early July actually feel further. As at 8th of July this year call rate stood at 2.5 per cent, while OBB oscillated between 2.0 per cent and 5.0 per cent.
But as at last week, precisely on the 15th of July, call rate has shot up to between 12 and 14 per cent, while OBB has gone up to between 11 and 16 per cent.
While inter-bank rate (the rate at which banks lend amongst themselves) rises astronomical 420 per cent, normal lending rates would definitely be at of reach for small businesses that still have infrastructural and security problems to battle with.
While Bismarck rewane, chief executive officer of Financial Derivatives Company (FDC) Limited agrees working to reduce interest rates in a must for the economy to grow, there are other factors that must be considered.
“While decrease in interest rates is politically expedient to stimulate economic growth, it may not be the appropriate move due to currency and inflationary pressures”, said Rewane.
In this case, there are too many children inside the basin with the bath water. If the Central Bank of Nigeria (CBN) decides to save the ‘interest rate baby” and throw away the bath water with ‘inflation and currency baby’, it will still hurt the economy in other serious aspects.
The implication is that, when the Monetary Policy Committee (MPC) meets this week, it will be between the devil and the red sea, whichever decision it is bold enough to make.
Rewane summed it up: “As exchange rate is interest rate driven, the outcome of the MPC meeting will have an effect on the currency”.
He said, for instance, if the MPC allows currency to float to N205-210, cut the Monetary Policy ratio (MPR) from 13 per cent per annum to 12 per cent per.annum, and reduce the Cash Reserve Ratio (CRR), Rewane believes those measures will make the currency will find its true value, it will encourage lending & stimulate economic growth, remove the fear factor, stimulate economic activity with accommodative monetary
Policy, international investors will increase their positions in Nigeria, and the divergence in rates will reduce.
But such a decision will impact on short term increased inflationary pressure, risk investment flow reversal, only ensure relative stability of the exchange rate, and possibly slowdown in the depletion rate of the external reserves level.
On the other hand, if the MPC maintains status quo, as it has done for a long time and leaves the foreign exchange (forex) rates- Inter-bank Foreign market (IFEM) at N199/$, increase administrative measures and sterilize more naira. Rewane is afraid that such steps will eventually make the CBN succumb to market pressure.
He said, the impact:will magnify economic distortions, fear factor will continue, the parallel market premium will increase, and naira will depreciate in the parallel market towards N240, while stock market will crash further.
The liquidity situation for banks is made easy with the recent withdrawal of $1.2 billion from the banks to the central bank.
The NNPC reportedly wrote to the lenders last Tuesday, intimating them of its intention to transfer its domiciliary accounts worth $1.2 billion to the Central Bank of Nigeria (CBN).
A top NNPC official, who pleaded anonymity, confirmed the withdrawal yesterday. He said the decision to move the accounts to the CBN stemmed from the ongoing probe of the corporation, stressing that it was to harmonise all “their accounts.”
A CBN official, who also asked not to be named because he has no clearance to speak on the issue, corroborated the NNPC official’s statement.
He said the NNPC’s directive to transfer its funds to the Central Bank was in order given the fact that the CBN is a banker to the government and that the oil corporation is also an institution of the government.
But the withdrawal of the funds has continued to jolt the money market, as banks, which had already created assets with the dollars, were said to be running helter-skelter to restructure the mis-matches that had been created with the NNPC funds.
According to reports, a treasurer in one of the tier-one banks said lenders may have to start calling back their dollar loans extended to customers.
“This is a serious problem for us because the CBN has not been selling dollars to banks and we have used the dollars being recalled by NNPC to pay for trade obligations to customers offshore,” said another senior treasurer of a tier-two bank.
Renaissance Capital, a leading investment banking firm originating from Russia that operates in high-opportunity emerging and frontier markets, few days ago, put the shortfall in the forex market, which the apex bank had not been able to meet at $4 billion.

Inter-Bank Rates

7/15/2015 Call Rate 12.0000 – 14.0000%
OBB Rate 11.0000 – 16.0000%
7/14/2015 Call Rate 12.5000 – 12.5000%
OBB Rate 11.0000 – 13.0000%
7/13/2015 Call Rate 12.0000 – 12.0000%
OBB Rate 12.0000 – 13.5000%
7/10/2015 Call Rate 11.0000 – 12.5000%
OBB Rate 7.0000 – 13.0000%
7/9/2015 Call Rate 7.0000 – 7.0000%
OBB Rate 5.0000 – 7.0000%
7/8/2015 Call Rate 2.5000 – 2.5000%
OBB Rate 2.0000 – 5.0000%
7/7/2015 Call Rate 4.0000 – 4.0000%
OBB Rate 5.0000 – 5.0000%
7/6/2015 Call Rate 5.0000 – 5.0000%
OBB Rate 5.0000 – 5.0000%
7/3/2015 Call Rate 3.0000 – 4.0000%
OBB Rate 5.0000 – 6.0000%
7/2/2015 OBB Rate 6.7500 – 6.2500%

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