The structure of Nigeria’s banking system is stifling savings, wealth creation, and economic growth, particularly for low-income individuals and small businesses.
Over the past few years (2023–2025), interest rate spreads in Nigeria have surged from 6 percent to 19 percent, making it harder for businesses and individuals to access affordable credit.
Financial experts explained that saving and investment are two sides of the same coin—when savings decline, investment also declines, negatively impacting economic growth.
The report highlighted how high lending rates discourage borrowing for productive investments, thereby hindering wealth creation and stifling economic expansion. Small and Medium Enterprises (SMEs) and individuals face challenges in securing credit at affordable rates, limiting their ability to grow their businesses, create jobs, and contribute to the economy.
The report pointed to how the Central Bank of Nigeria’s (CBN) high Cash Reserve Ratio (CRR) of 50 percent, along with the AMCON levy, Nigeria Deposit Insurance Corporation (NDIC) premiums, and upcoming windfall taxes, have forced banks to increase interest rates on loans.
Since banks must hold 50 percent of their deposits with the CBN without earning interest, they compensate for this lost revenue by charging higher lending rates and offering low deposit rates.
The CBN’s monetary policy stance, including high benchmark rates like the Monetary Policy Rate (MPR), significantly influences interest rate spreads. The higher the MPR, the more banks raise lending rates, widening the spread between loan and deposit interest rates.
It further highlighted that Nigeria’s banking system also faces high levels of non-performing loans (NPLs), making banks more cautious when lending.
To mitigate default risks, banks impose higher interest rates, further discouraging borrowing and economic expansion.
“Unlike their counterparts in advanced economies, Nigerian banks lack access to affordable capital, forcing them to rely on high-cost deposits or expensive interbank borrowing. This results in higher interest rates on loans, reducing affordability for businesses and individuals, “ it stated.
The report found that Nigeria’s widening interest rate spreads have contributed to: Lower GDP Growth as high lending rates suppress economic activity, leading to lower investment and production levels.
It also leads to reduced savings culture as low deposit rates make saving less attractive, decreasing the amount of capital available for investment.
It promotes Income Inequality and Poverty because limited access to affordable credit widens the gap between the rich and the poor, particularly in rural areas.
High borrowing costs according to the report, make it difficult for manufacturers to expand, leading to lower productivity and slower economic growth.
Another area according to some analysts, where the structure of the banking system is discouraging savings is the Standing Lending Facility (SLF).
As of August 26, 2024, the SLF rate from the Central Bank of Nigeria (CBN) is 31.75 percent. This rate is used by banks to borrow short-term funds from the CBN, whereas the same CBN pays 26.50 percent to banks that deposit excess funds with it.
In a bid to streamline its monetary policy operations, the Central Bank of Nigeria (CBN) introduced a single-tier remuneration structure for its Standing Deposit Facility (SDF).
This means all deposits under the SDF will now earn interest at the Monetary Policy Rate (MPR) minus 100 basis points. With the current MPR set at 27.50 percent, this translates to a fixed SDF rate of 26.50 percent.
Stakeholders also frown at the practice whereby the CBN mandates banks to set aside 50 percent of their deposits as Cash Reserve Ratio (CRR), yet, banks had paid interest on such deposits but cannot use them.
CRR is a fraction of total deposits that banks must keep with the central bank. This is unremunerated, meaning that regardless of whether the banks got the deposits from their customers at a cost, the CBN does not pay the banks interest on such sterilized funds.
Essentially, a very high CRR radically reduces the loanable funds in the system, thereby reducing the amount of money available to chase a limited supply of foreign exchange and other products and services.
To address these issues, the report recommends a mix of regulatory, structural, and market-based reforms.
It noted that the CBN should reduce the CRR from 50% percent to 20–25 percent to increase the amount of money banks can lend.
This would stimulate business expansion, job creation, and GDP growth.
The CBN should also lower the MPR in a way that does not fuel inflation. A more balanced approach would reduce lending rates and encourage investment the report stated.
The government should reduce excessive borrowing, as high deficit spending increases inflation, leading to higher interest rates.
Improved coordination between monetary, fiscal, trade, and industrial policies would create a more stable economic environment.
The report urges policymakers to restructure or eliminate multiple levies such as the AMCON levy, NDIC premiums, cybersecurity tax, and windfall taxes.
These costs are ultimately passed on to customers through higher loan interest rates and lower deposit rates.
If the recommended reforms are implemented, businesses and individuals would have greater access to affordable credit, boosting investment.
Also, with better deposit interest rates, Nigerians would be more inclined to save, increasing the funds available for lending and easier access to credit would spur job creation, entrepreneurship, and industrial expansion.
Small businesses and rural communities would benefit from more inclusive financial services.
The study, co-authored by Mustafa Chike Obi, Chairman of the Bank Directors Association of Nigeria (BDAN), and Adetilewa Adebajo, CEO of CFG Advisory, points to high banking fees, excessive interest rate spreads, and restrictive monetary policies as key factors discouraging financial inclusion and investment.
