Home Finance Interest rates may crash soon, low public sector borrowing

Interest rates may crash soon, low public sector borrowing

by Business News Report

By Omoh Gabriel, Business Editor
Bank interest rates which range between 21-28 per cent at the moment may soon crash to between 16 and 18 per cent. This follow a trend which started in 2004 in which public sector demand for loans from the banking system has declined to a very low level. The trend which is expected to continue as a result of the favourable international high prices for crude oil combined with the ongoing banking reform will force down bank interest rates in the country which will go a long way to boost local investment.
Giving an insight into the development, the Central Bank Governor, Professor Charles Soludo on Tuesday in Abuja said that “deposit and lending rates declined in response to the low public sector demand for bank credits and the banking sector consolidation”. Last week most banks cut their deposit rates to about 10 per cent an indication that lending rates will soon follow. The allowable spread between deposit and lending rates is usually 4 per cent above the deposit rate. According to Professor Soludo “this development is in line with the targeted monetary aggregates which are consistent with the NEEDS”. Professor Soludo disclosed that while total bank credit to the economy grew by 29.1 per cent in 2003, it drop to 12 per cent in 2004, far below the 24.5 per cent projection made earlier in 2004. As a result during the course of last year total bank loans to the economy increased by 12 per cent arising from credit to the private sector. Hitherto, the public sector borrowing from the banking system has always crowded out the private sector because government could afford to borrow at very high interest rate. The public sector high demand for credit had in the past driven up interest rates making it unprofitable for private investor to borrow from the bank for any capital project. This development had pitched the President Chief Olusegun Obasanjo against the banks in which he vowed to force interest rates down. The trend of low public sector demand for bank credit has resulted in banks bringing down rates.
According to the CBN Governor, while credit to the private the private sector grew by 26.6 per cent compared to a target of 30 per cent in 2004, net credit to the federal government declined by 17.9 per cent as against 58.4 per cent increase in 2003. It will be recalled that since the inception of the present civilian administration in the country the prices of crude oil has been above the budget bench mark leading to the much talked about excess oil revenue. In fact the oil wind fall has resulted in a strategic build up of the country’s external reserves which at last month stood at about $24.6 billion with a total of $16.96billion addition in 2004.
Professor Soludo disclosed that domestic output of goods and services in the country in 2004 grew by 6.1 per cent compared to the 10.2 per cent recorded in 2003. The CBN governor said that the growth of 6.1 per cent exceeded the target of 5 per cent set in the NEEDS document for year 2004. The governor further disclosed that the growth in the economy was driven by the non oil sector which recorded a 7.5 per cent growth. The governor said that the rate of inflation decelerated to 10 per cent from 23.8 per cent in 2003.

Giving an insight into the general condition of Nigerian banks in 2004, the apex bank boss said that in 2001 ten banks were sound. This rose to 13 in 2003 declined to 11 in 2003 and dropped to 10 in 2004. According to him 63 banks out of the 89 banks in the country were classified as satisfactory. This dropped to 54 in 2002, 53 in 2003 and 51 in 2004. In the same vein 8 banks were classified as marginal banks in 2001, 13 in 2002, 14 in 2003 and 16 in 2004. Similarly 9 banks were said to be unsound in 2001, 10 in 2002, 9 in 2003 and 10 in 2004.
The continued deterioration in the health of the Nigerian banks lead to the 13 point agenda which was introduced for bank consolidation in the country. The exercise was expected to force down interest rates in the banking sector.

File interest rate: 12/05/05

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