Banks And Hurtful Interest Rates

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At a recent outing, the President and Chairman of Council of the Chartered Institute of Bankers (CIBN), Professor Segun Ajibola, re-echoed an issue that had, over the years, bothered and is still bothering the government and people of Nigeria. From his vantage position in the industry, he lamented that interest rates in the country are among the highest in the world. This is not disputable.

He also expressed his worry over the quick win propensity of banks especially their reluctance to lend to sectors that are critical to the growth of the economy such as agriculture, micro, small and medium enterprises (MSME). He blamed this disposition on the part of the deposit money banks (DMBs) for the weak performance of the economy.

It is impressive, in our view, that this observation is coming at this time that the government is making strenuous effort to rebuild the economy and create jobs by incentivising the MSMEs which it hopes the banks will buy into. It is even more reassuring that it is the regulatory arm of the profession of banking that is bringing back this matter to the forefront of national discourse.

Banks, by way of defending the policy they know is not only hurtful to the economy but exposes their seeming lack of patriotism, consistently explain away the anomaly as a process dictated by the perceived rules of the business as set by them to enhance their dominance of a major instrument of economic growth and development.

At other times, they resort to the defeatist argument that is unhelpful and which is hinged on what they claim to be the cost of funds but which their customers know is a ploy to generate easy cash to finance their ostentatious lifestyle as pointed out by Ajibola in his remarks.

The regulatory agency of the sector, the Central Bank of Nigeria (CBN), had at numerous fora described as a distortion the tendency on the part of the banks to insist on such outrageous rates they charge on facilities which fly in the face of reality when compared to the peanuts they pay as interest on deposits. And to manage the situation so as to encourage them to be more flexible in their operations vis-à-vis the health of the economy, the apex bank had tried to intervene in various ways to nudge these DMBs to help oil the engine of growth of the economy by lending to the critical sectors. Not much has been achieved as the rates continue to remain high.

This policy of banks that promotes quick and easy wins is part of the reason why the economy is unhealthily import- dependent. At the high rate of interest on facilities, only traders who buy and sale and make fast turnovers and the expected precipitate returns on investment, can afford to access the loans. It gives real cause to ponder when banks declare stupendous profits in an economy that is almost lying prostrate.

It also elicits the question, what business activity did they engage in to earn such income? Traders don’t create jobs. The real sector does. Agriculture does. SMEs do. But because of the nature of what they do which demands longer gestation period, return on investment is slow. Banks lack the frame of mind and the discipline to pursue that sure pace that leads to prosperity for the majority.

Elsewhere in developed economies, fixing of interest rates is not the prerogative of banks themselves alone. It is like war which, it is said, cannot be left to Generals alone. The apex banks of countries are involved. The legislature is also involved. The reason is simple, interest rate, in most cases, dictate the flow of investment. It is certainly not a free for all left to the whims and caprices of the sharks that rule the banking industry.

It is not acceptable that the government, including the lawmakers, should stand aside, wring their hands in despair and despondency, in a manner that suggests helplessness, while banks run riot in the system. Nation-building is a task that demands effective contribution and sacrifice by all including the banks. Is it not an irony that it is only the financial sector of the economy that is booming in a situation such as Nigeria’s?

We are familiar with the thesis that in a market economy there is free entry and free exit; also that policies must not be by fiat. But there are no such absolutes anywhere. In the headquarters of capitalism, the United States of America, banks don’t just wake up and fix rates as they dim appropriate to satisfy their selfish pecuniary interests. A lot of factors come into play before adjustments in interest rates are authorised. It is our considered opinion that such practice must necessarily apply in Nigeria before the banks run the country and the economy aground.