Nigerian banks are widening their interest rate margins in response to rising inflation and higher operating costs, leading to increased lending rates and reduced deposit rates for customers. The move aims to cushion the impact on profitability, but it means higher borrowing costs for consumers while offering lower returns on deposits.
According to recent data from the Central Bank of Nigeria (CBN), the average maximum lending rate rose by 3.15 percentage points to 30.73% in February 2022, up from 27.58% in December 2021. Similarly, the prime lending rate saw a slight increase of 0.10 percentage points, reaching 11.78% in February. In contrast, the average deposit rate in banks dropped by 0.47 percentage points to 4.6% in February, down from 5.07% in December.
Deposit rates for various tenures also fell during this period. The average interest rate for one-month deposits decreased by 0.27 percentage points to 3.46%, and three-month deposits dropped by 0.46 percentage points to 4.48%. Six-month deposits saw a decline of 0.26 percentage points to 4.56%, while the most significant drop occurred in 12-month deposits, which fell by 0.95 percentage points to 5.84%.
This trend of rising lending rates and declining deposit rates has resulted in a 3.15% increase in banks’ interest rate margins. Experts suggest this adjustment is closely tied to the increase in banks’ operating cost-to-income ratio, which jumped by 4.9 percentage points in 2021. According to the CBN’s Banking System Stability Review Report, banks’ operating cost-to-income ratio rose to 73.1% in 2021, up from 68.2% in 2020, driven by inflationary pressures and higher Asset Management Corporation of Nigeria (AMCON) charges. This means that for every N100 in revenue, banks spent N73.1 on operating expenses in 2021, compared to N68.2 in 2020.
Banks’ efforts to mitigate the effects of rising costs are now being passed on to customers in the form of steeper lending rates and diminished deposit returns, reflecting the broader impact of inflationary pressures on the banking sector and the economy.
