Experts warn that the high interest rate spread in Nigerian banks might hurt the nation’s economy by 20 to 30 percent, making things worse for people and companies whose purchasing power has already been severely damaged.
Mustafa Chike-Obi, the chairman and CEO of the Bank Directors Association of Nigeria, and Tilewa Adebajo, the CEO of Lagos-based CFG Advisory, announced their stance on Thursday during an Arise TV program.
“Nigeria has the highest interest rate spread in the world, and the reason for this is that we have some very huge systemic challenges, as you can see with inflation. Nigeria’s interest rate spread has been significant since 2009,” Adebajo remarked.Â
Interest rate spreads in Nigerian banks have significantly expanded during the last three years, from 2023 to 2025, rising from 6% to 19%, a record high, according to The CFG Advisory.
The difference between the interest rates banks give on deposits and loan charges is known as the interest rate spread.
The largest oil producer in Africa is battling historically high interest rates brought on by extremely high inflationary pressures. The growing rate is affecting corporate growth and driving up borrowing prices.
The Nigerian government must strike a balance fiscally and monetarily to achieve sustained prosperity. Chike-Obi clarified that boosting oil production to 500,000 barrels per day would not even make a difference.
“The economy is being held back by this spread. Businesses are unable to borrow. Credit is not available. And we’re offering a very low rate for saving, so people can’t save,” the head of the Bank Directors Association stated.
“If the spreads are less than 5 percent, I believe our GDP could be 30 percent larger,” he added.
The key interest rate was raised by a meagre 25 basis points to 27.5 percent at the most recent Monetary Policy Committee (MPC) meeting in November. However, the asymmetric corridor remained constant at +500/-100.
The Cash Reserve Ratio (CRR) for merchant banks remained at 16 percent, while the CRR for deposit money banks (DMBs) remained at 50 percent. Additionally, the liquidity ratio remained constant at 30%.
In their research, ‘Adverse Effects of High Interest Rate Spreads on the Nigerian Economy,’ the duo stated that Nigeria’s high rate spreads are driven by regulatory requirements, monetary policy stance, liquidity and funding, and increased credit risk.
According to Chike-Obi, one of the main issues is the CRR, which is the highest in the world at 50% and is followed by Turkey at 25%.
A high CRR requires that half of a bank’s naira deposit go to the Central Bank of Nigeria (CBN), with the other half paid at zero percent interest.
“If we get a deposit for which we are supposed to pay 20%, we pay 10% as we have already given the CBN 10% or half of it. That has the greatest impact on the interest rate spread,” Chike-Obi explained.
The operations of small firms, which are the foundation of any economy, are severely hampered by low investments and restricted access to financing in an economy with a high interest rate spread.
The cost of borrowing naturally rises when interest rates are at all-time highs, restricting corporate expansion and slowing economic growth. While saving rates decline, poverty and inequality rates rise.
Import Dependency Is Being Fuelled By A High Interest Rate Spread
According to Chika-Obi, Nigerian banks’ high interest rate spreads prevent them from lending to important economic sectors that could spur the growth required to raise the country’s GDP.
Construction, industry, manufacturing, and SMEs are not receiving bank loans. Banks only lend to individuals with a life cycle of six months or fewer, such as petroleum exporters and importers.
“Two years from now, our import dependency will actually increase. Today, borrowing costs are the biggest expense in company. Businesses nowadays are not feasible due to the interest rate spread,” he remarked.
He clarified that a significant reliance on imports might strain the naira, which has been rather stable over the last two months.
The Supply Side Of Dollars
Chike-Obi emphasized that if Nigeria is still dollar-starved, the outlook for 2025 is still dire. To turn the corner, the government must consider how it might produce more dollars to meet its foreign exchange needs.
Adebajo stated, “We need to maintain unorthodoxy,” adding that closing the production gap might stimulate the economy and lessen the need for monetary intervention in response to budgetary problems.
Cardoso: The CBN’s Policies Kept Inflation From Rising To 42.8%
The CBN governor, Olayemi Cardoso, stated on Thursday that the bank’s tighter measures prevented inflation from rising to 42.81 percent by December 2024.
Cardoso gave a speech at the Monetary Policy Forum in Abuja, bringing together market economists, policymakers, scholars, monetary and fiscal authorities, and subject-matter specialists to examine emerging economic concerns, including handling the expected disinflation process.
According to National Bureau of Statistics (NBS) data, core inflation was the main driver, which hit 34.80% in December 2024. There were indications that food inflation was slowing down.
Cardoso spoke to the audience, recalling how liquidity infusions since the COVID-19 outbreak have resulted in a substantial overhang, inflationary pressures, and increased foreign exchange volatility.
He claimed that although those steps were taken to lessen the immediate effects of the epidemic, they did not result in a proportionate increase in output. He claimed that to restore stability, this emphasizes the need for a methodical and coordinated approach to monetary policy.
In 2024, the CBN increased the Monetary Policy Rate (MPR) by 875 basis points to 27.50 percent to curb the rise in inflation. The asymmetric corridor surrounding the MPR was also altered, and the Cash Reserve Ratio (CRR) of Other Depository Corporations (ODCs) was raised by 1750 basis points to 50.00 percent.
Cardoso reaffirmed that these actions had been successful despite ongoing inflation.
