Policy Options for Low and Sustainable Lending Rates in Nigeria

Abstract

The average prime and maximum lending rates were as high as 16.96 per cent 24.65 per cent in 2012. Conversely, the weighted average savings and term deposit rates stabilized at 5.30 per cent between July and October 2012.The level of interest rate is important in the mobilization and allocation of funds in an economy. Therefore, it is not surprising why the current high lending interest rate regime in Nigeria remains a source of concern to policy makers. This paper articulates the factors explaining the present high cost of funds in the Nigerian banking system and policy options useful in achieving low and sustainable interest rate objectives in Nigeria. Using descriptive analysis covering the 1990s, when the interest rate was fully deregulated in Nigeria, up until 2012; the paper notes that high interest rate is largely driven by high sunk costs due to dearth of infrastructure. It recommends a strong legal framework for addressing loan defaults. In this direction, review of the legal clause which gives undue advantage to borrowers is critical. A time frame for the disposal of loan default cases need to be set as prolonged litigations at the instance of loan defaulters usually stall the process of take over and the consequent auctioning of borrowers’ collateral by lenders to recover their loans. In addition, provision of constant electricity is necessary to significantly reduce bank cost of funds.

DOI: 10.5901/mjss.2013.v4n3p147