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Manufacturers decry high interest rates

By on September 29, 2013

Manufacturers and many small and medium scale enterprises have been complaining that the current interest rates being charged by banks have been affecting their effort to create wealth and reduce the unemployment rate in the country.

Some have argued that the double digit interest rates charged by banks are not in any way friendly to manufacturers, noting that to pay millions of naira to bank for borrowing some millions is not encouraging enough given the nation’s business environment, which is characterised by infrastructure deficiency, inflation, and power cuts.

President of the Manufacturers Association of Nigeria (MAN), Chief Kola Jamodu, said the Central Bank of Nigeria’s tight monetary policy is not healthy and manufacturing friendly.

According to him, the development will continue to create difficulties for operators to access funds for their operations, as well as for expansion.

Jamodu lamented that the Monetary Policy Committee (MPC) of the CBN has in the last one year maintained a status quo as regards Monetary Policy Rate (MPR) and Cash Reserve Requirement (CRR) at 12 per cent and Liquidity Ratio at 30 per cent respectively.

This, he said, has pushed average interest rates on loans to a range between 22-25 per cent all year round outside the Bank of Industry (BoI) and the Central Bank of Nigeria (CBN) intervention window of seven per cent, warning that this is not friendly to manufacturing. “The resolution of the Monetary Policy Committee (MPC) to continue to retain tight money supply is not healthy for the productive sectors of the economy. This will continue to create difficulties for operators to access funds for their operations as well as for expansion.

President of the Lagos Chambers of Commerce and Industry, Goodie Ibru said many small and medium scale enterprises in the country still have difficulties in accessing credit due to high interest rates, noting that the tight monetary policy constitutes a nightmare to most businesses in Nigeria.

Ibru said many manufacturers are frightened to take loans because of high interests, adding that the tight credit situation has become a major inhibiting factor to the capacity of domestic enterprises to take advantage of the robust Nigerian market.

Former President of the National Association of Chambers of Commerce Industry, Mines and Agriculture (NACCIMA), Dr. Herbert Ajayi, said the current interest rate is disturbing and an impediment to business growth in Nigeria.

Minister of Finance and the coordinating minister of the economy, Dr. Ngozi Okonjo-Iweala, said the current regime of interest rates in the country was too high for the productive sector of the economy, describing the 20 per cent lending rate being charged by commercial banks on loans obtained by industries as outrageous.

Deputy Governor, Operations of the Central Bank of Nigeria (CBN), Tunde Lemo, said the banks are unconsciously passing part of the high cost of operating financial institutions on borrowers.

Lemo said banks battle stressful operational issues, particularly the infrastructural deficits that have been the bane of businesses in Nigeria, which was the reason for the high interest rates.

Historical perspective

The Monetary Policy Committee of the Central Bank of Nigeria (CBN) has since October 2011 maintained a status quo as regards Monetary Policy Rate and Cash Reserve Requirement at 12 percent and Liquidity Ratio at 30 percent respectively.

The CBN Monetary Policy Rate is the overnight rate at which the apex bank administers loans to the deposit money banks in the country. This instrument impacts on interest rate on loans from deposit money banks, inflation rate and naira exchange value.

According to the Central Bank of Nigeria, the prime and maximum lending rates on the average rose from 16 percent in 2011 to 18 percent and 25 per cent respectively at the end of 2012.

The International Monetary Fund, (IMF), one of the Brentwood institute, had after a survey it carried out ranked Nigeria among countries with the highest interest rate.

According to Jide Ojo, a Public Affairs Analyst, Nigeria’s Central Bank of Nigeria Monetary Policy Rate (MPR), otherwise known as the benchmark interest rate has been at double digit for many years now, explaining that in 2012, it was largely at 12 per cent, but noted that by the time deposit money banks charge their own lending rates to prospective customers wanting to borrow money, it’s usually between 15 – 20 per cent and more. This, he said has made nonsense of government’s effort at stimulating the real sector of the economy. “Even the aviation, textile and entertainment intervention funds set aside by government to revitalize these ailing sectors have been difficult to access by the target beneficiaries. Banks, apart from charging high interest rates on loans, also add all manner of administrative or miscellaneous charges which make the burden of borrowing unbearable. What obtain in many other developing countries are low interest rates of between 5-8 per cent with a moratorium. What cheap loans do for entrepreneurs are that it makes take off and expansion of business relatively easy for the investors. With that, the cost of doing business is reduced and they in turn will be able to provide cheaper services and goods. Invariably the consumers get a better deal from the producer,” he said.

Reasons for high interest rate

Experts have noted that there are combinations of factors bordering on the complex to the superficial that are responsible for the soaring interest rate regime in the country.

The benchmark interest rate retained currently is 12 per cent, which experts have argued, is the highest in the world.

For instance, Dr. Austin Nweze, a political economist and senior lecturer at the Pan African University, said the growing interest rate being witnessed in the country, is as a result of using the foreign exchange as a basis for the nation’s monetary policy rate by the CBN.

He said unlike in the past when the Assets Management Corporation of Nigeria (AMCON) easily bought over non-performing loans and has frozen asset acquisition, noting that the banks are no longer prepared to take moral hazards, a situation where it can give out loans with the hope that someone would cover its back. So, the result, he said, is that the few banks that are willing to borrow don’t have any choice but to borrow at highly exorbitant interest rate.

A financial analyst, Charles Iyore, attributed the escalating interest rate to the problem of weak price discovery mechanism, non-performing assets as well as an in-efficient capital market.

Henry Boyo, an economist, said high interest rate destroys production because it leads to high cost of production. “So, don’t be surprised when houses are being converted to mosques or churches as a result of high interest rate and we also have uncompetitive local products,” he said.

What should be done

As a way out of the biting interest rate, the former NACCIMA president, Herbert Ajayi, implored CBN to end its tight monetary control measure in order to stimulate growth in the economy and encourage lending to the real sector.

He also advised that interest rate should be reviewed downwards to a single-digit in view of the long-term nature of manufacturing investment.

He also advised that the various intervention funds should be redesigned and made business-friendly with effective implementation to the real sector operators to achieve the purpose it was designed for, urging the federal government to explore the possibility of establishing specialized banks for manufacturing and construction sectors.

Similarly, LCCI President, Mr. Goodie Ibru, implored both fiscal and monetary authorities to work together to ease the credit conditions, especially for the small and medium scale enterprises and domestic businesses.

He said unlocking the Nigerian credit market at this time is critical to prevent gradual crowding out of domestic entrepreneurs by foreign investors.

Former President of the Manufacturers Association of Nigeria, Alhaji Bashir Borodo, also advocated for the introduction of a single-digit interest rate on agricultural loans to enhance growth in the sector.

Borodo said the measure would stimulate investment and encourage development of agricultural enterprises, adding that high interest rate was militating against effective agricultural financing in the country.

“The greatest problem with agricultural financing is the interest rate. Interest is generally about 20 per cent and 25 per cent.

“With the intervention of the Central Bank of Nigeria, the interest rate is now about 12 per cent.

“It is good to review it further down to a single digit forsustainable development,” he said.

Government to rescue manufacturers

Manufacturers, however, may soon heave a sigh of relief if the intention of government to establish special finance institution that will attract funds into the economy at lower interest rates is actualized.

According to the Minister of Finance and the Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala, the bank, which could be established in the next 15 to 18 months, would lend funds to the Bank of Industry, Bank of Agriculture and commercial banks to ensure that interest rates are reduced to a sustainable level for indigenous industries to grow.

Okonjo-Iweala said the government was concerned about the high interest rates being charged by banks and was working to provide an enabling environment that would assist the banks to reduce the rates, especially for indigenous manufacturers and industrialists.

“We are going to build a development finance institution maybe in the next 15 months to 18 months, a wholesaler that will bring funds and more liquidity into the economy at a lower rate so that it can lend to the BoI and BoA, other industries and even straight to the commercial banks.

“In the meantime, let our industries not be killed because I have looked at the structure of the economy, it does not warrant 20 per cent interest rate. Government wants the interest rate to come down because we believe that we cannot have sustainable investments at such a high interest rate.

“We are not saying that the banks should not make profits. They are there for profit-making. It must be a commercially viable enterprise but why must they charge 20 per cent? Our inflation has gone from 12 per cent in January this year to 8.7 per cent now, meaning that interest rates can also go down,” she said.

Also, CBN’s Deputy Governor, Operations, Lemo, said the apex bank would also continue to provide soft landing for the banks and other sectors through deliberate policies to bring down interest rates.

“We are also using moral suasion to urge the banks to tune down their profit motives which is why convinced them to drop the maximum COT charges from 5% to 3% with a commitment also that in the next 5 years it disappears from the customers books. I think we are heading in the right direction and things will get better as we go,” he said.

 

 

 

[Daily Independent]