CBN’s 22.75% interest rate hike sparks fears of increased non-performing loans- Experts

Some financial experts have expressed concerns regarding the hawkish monetary policy stance adopted by the Central Bank of Nigeria (CBN), which recently led to another increase in the interest rate by 22.75%. 

In an exclusive discussion with Nairametrics, these experts highlighted the potential downside effects of the heightened monetary policy rate (MPR) on existing bank loans. 

They pointed out that this could prompt banks to adjust their loan pricing, potentially worsening levels of non-performing loans (NPLs) and putting pressure on financial stability indicators. 

Substantial increase in the monetary policy rate 

The Central Bank of Nigeria recently implemented a substantial increase in the monetary policy rate (MPR), raising it by 400 basis points to a historic 22.75%.  

This marks the highest level of MPR recorded in the country, surpassing the previous rate of 18.75%, which had been maintained since the last Monetary Policy Committee (MPC) meeting held on July 24th and 25th, 2023. The 400 basis points increase represents the largest hike on record. 

Additionally, the CBN elevated the Cash Reserve Ratio to 45% while keeping the liquidity ratio unchanged at 30%. 

 Furthermore, adjustments were made to the Asymmetric Corridor, with the upper limit raised to +200 and the lower limit to -700. 

What market experts are saying: 

Mr. Mike Eze, the Managing Director of Crane Securities Limited, pointed out that in the short term, the banking sector may experience positive outcomes due to the higher interest rates, resulting in windfall gains for some institutions.  

However, he cautioned that many businesses may struggle to meet their loan obligations in the future, potentially leading to an uptick in non-performing loan figures. 

Mr. Eze elaborated on the Central Bank of Nigeria’s repeated commitment to maintaining a hawkish monetary stance as part of its strategy to combat inflation.  

However, he expressed skepticism regarding the effectiveness of this approach in addressing the root causes of inflation, given the complex factors contributing to its rise. 

Among the factors he highlighted as driving inflation were insecurity affecting food production, currency depreciation, and escalating costs associated with importing energy inputs. 

 He emphasized that while increasing interest rates may be the CBN’s preferred tool for addressing inflation, it may not adequately address the underlying issues fueling inflationary pressures. 

Eze cautioned that the consequences of the current monetary approach might not be immediately apparent, suggesting that there could be lag effects before the negative impacts manifest. 

He warned of an anticipated increase in non-performing loans, which could prompt the need for interventions to manage defaults. 

 He emphasized the importance of recognizing that the current strategy may not fully resolve the inflationary challenges, particularly if the root causes are not directly addressed. 

Professor Uche Uwaleke, Nigerian First Professor of Capital Market and the Director of the Institute of Capital Market Studies at the Nasarawa State University Keffi said jerking up the MPR by 400 basis points in one fell swoop is simply an overkill. 

Uwaleke noted that the impact of these policies on the real sectors of the economy is a matter of concern.  

  • “With the CRR now set at 45%, a substantial portion of deposits is effectively locked up, leaving banks with limited resources for lending.  
  • This poses challenges for access to credit, increases the cost of capital for firms, raises the cost of debt service for the government, and affects the asset quality of banks,” he said. 

Uwaleke noted that anticipated repercussions include banks adjusting their loan pricing, which may exacerbate non-performing loan levels and strain financial stability indicators.  

  • The overarching objective of curbing inflation, driven by both monetary and non-monetary factors, may inadvertently lead to economic contraction.  
  • This could manifest in lower GDP figures, particularly in the agricultural and industrial sectors, and have ripple effects across the stock market and employment levels,” he said. 

Mr. Olatunde Amolegbe, the Managing Director of Arthur Steven Asset Management Limited and former President of the Chartered Institute of Stockbrokers (CIS) said the unprecedented 400 basis point increase in the Monetary Policy Rate (MPR) demonstrates a clear intent to address inflationary pressures.  

Amolegbe noted that it is anticipated that these measures will encourage greater foreign exchange (FX) inflows from Foreign Portfolio Investors (FPIs) and channel liquidity away from speculative FX trading, potentially enhancing stability in the FX market. 

However, he said that the elevated MPR could elevate borrowing costs for corporations already grappling with substantial FX revaluation losses.  

  • “This may lead to an uptick in loan defaults and a rise in Non-Performing Loans (NPLs) for banks. 
  • In terms of the equities market, a notable price correction is expected as investors pivot towards the fixed income market in response to the tightening monetary policy stance,” he said. 

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