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Nigeria likely to cut rates in November as bank lending rules ineffective

By David Whitehouse
Posted on Friday, 23 August 2019 11:06

Nigeria's Central Bank Governor Godwin Emefiele.
Nigeria's Central Bank Governor Godwin Emefiele. REUTERS/Afolabi Sotunde

Nigerian central bank moves to push banks to increase lending will be a damp squib, meaning an interest-rate cut is in prospect, says John Ashbourne, senior emerging markets economist at Capital Economics in London.

Under the new rules, the country’s banks have to have a minimum loan to deposit ratio of 60% by the end of September. Ashbourne says he’s “sceptical of unconventional Nigerian central bank policymaking”, including the new lending requirements. He expects the central bank will recognise that the policies have been ineffective and predicts a 50 basis-point cut in Nigerian interest rates in November.

Lack of adequate credit information makes it difficult for banks to ascertain which firms are good prospects for loans, Ashbourne wrote in a note in July.

  • A better credit reference system will take years to develop, he wrote.
  • Banks may not need to grow their loan book to meet the new rules, in which loans to small companies are overweighted, the note says.
  • They could reallocate their loan book – or even simply re-categorise existing loans.

As long as government bond yields remain high, banks will prefer to park their money in treasuries, Ashbourne wrote in July.

  • The central bank’s banning of the country’s lenders from directly bidding for treasury bills at auction is ineffective as the lenders can still access the bonds in the secondary market, Ashbourne wrote.
  • The ban, therefore, does no more than create arbitrage opportunities.
  • Even if the ban did work, demand for bonds would suddenly dry up, causing yields to spike and prompting a painful fiscal crunch, Ashbourne wrote.

Ashbourne says that the yields which encourage the banks to buy them rather than lending to the real economy are “ultimately a fiscal problem.” The government needs to stop running massive deficits and improve tax collection, he says.

  • The government has done an “incredibly poor” job of extending the tax system, leaving Nigeria with the weakest tax collection system among industrialised African economies, he argues.
  • “It’s a big administrative challenge but it has to be done.”


Inflation declined by 0.14% to 11.08%. in July, but a downward trend is unlikely to be sustained, according to a note from Financial Derivatives Company (FDC) in Lagos on August 19.

  • Inflation stoking factors that have been benign are likely to become potent in August and September, FDC says.
  • These include minimum wage implementation and the adjustment in the exchange rate for custom duties.
  • President Buhari’s demand that the use of foreign exchange for food imports be halted will help the growth of the agricultural sector, but could push food prices up in coming months as the country depends heavily on food imports, FDC says.

The goal of increasing bank sector lending is hard to square with that of achieving lower inflation, Ashbourne says.

  • It’s difficult, he says, to see a policy move that would enable the central bank to achieve both those targets. He argues that with inflation running above target, the central bank should be tightening rather than easing to get inflation down. “That’s the textbook solution.”

Ashbourne expects that inflation will be persistently quite high and that this will undermine the spending power of ordinary Nigerians. The costs of inflation, he says, outweigh the benefits of increased lending which would be limited to specific actors in the economy – while high inflation affects everyone.

Bottom Line: Fiscal collection rather than tinkering with rules on lending is the key to putting Nigeria’s economy on a sounder footing.




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