How Nigeria can resolve its high interest rate spreads

In a recent CNBC Africa interview, Tilewa Adebajo, CEO of CFG Advisory, and Mustafa Chike-Obi, Chair of the Bank Directors Association of Nigeria, discussed the high interest rate spreads in Nigeria and offered potential solutions to address the issue. They emphasized the need for a coordinated and balanced approach involving both monetary and fiscal policy measures to reduce the average lending rates. The interest rate spread, which denotes the difference between what banks pay for deposits and what they lend at, has widened in Nigeria from about 6 percent to record highs of around 19 percent. This has significant implications for the economy, as a narrow spread is generally associated with stronger economic performance. Adebajo highlighted the critical role of the Cash Reserve Ratio (CRR) in influencing the spread, noting that a high CRR leads to a wider spread and slower economic growth. Chike-Obi echoed this sentiment, pointing out that Nigeria's CRR of 50 percent is the highest globally, underscoring the need for a more strategic approach to monetary policy. The experts identified four key causes contributing to the high interest rate spreads in Nigeria: regulatory requirements, charges and taxes, monetary policy stance, liquidity and funding, and high credit risk. They emphasized the need for a comprehensive policy framework that addresses these factors holistically. Adebajo stressed the importance of enhancing the efficiency of the banking system and fostering investment in critical sectors like manufacturing and real estate. He proposed releasing 20-25 percent of CRR funds for lending to these sectors at interest rates not exceeding 20 percent to stimulate productivity growth. Additionally, the experts highlighted the significance of policy coordination across monetary, fiscal, trade, and investment domains to create a conducive environment for economic expansion. While discussing potential solutions, they cautioned against measures that could inadvertently widen the interest rate spread, such as excessive levies on banks. They advocated for transparent and defined policies that incentivize investment and boost economic activities. Adebajo and Chike-Obi underscored the need for a progressive and quadratic policy implementation approach to achieve sustainable growth and reduce interest rate spreads. They emphasized the interplay between interest rate spreads and GDP growth, noting that a lower spread environment is conducive to higher economic output. In conclusion, the experts called for concerted efforts to address the structural challenges causing high interest rate spreads and restore Nigeria's economic vibrancy.