The interbank call rate for Nigerian lenders has surged to a seven-year high of 30.23 percent, increasing the burden on borrowers who now face higher lending costs.
The interbank call rate is the interest rate that banks charge each other for short-term loans, typically overnight. It’s an indicator of the extent of liquidity in the Nigerian banking system.
Data from the Central Bank of Nigeria (CBN) shows that interbank call rate increased by 13.86 percentage point year-to-date to 30.29 percent as of May 2024, from 16.43 percent in January this year.
The increase in the interbank call rate is attributed to monetary policy tightening of the central bank through Open Market Operation (OMO) and increase in Monetary Policy Rate (MPR), also known as benchmark interest rate.
“It is a function of demand and supply. If there is a lot of money or liquidity in the system, a lot of banks will not have a liquidity crunch,” Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, said in a phone interview.
“The number of banks that need money has increased and those that have excess money have reduced. If you want more money and there is less money available, the interest rate will go up. That is basically what is causing the increase, because the CBN is mopping up all the money in circulation.”
He said the impact will be high rate of borrowing in the economy.
The CBN has raised the MPR by 750 basis point to 26.25 percent in May 2024, from 18.75 percent in July 2023, to rein in inflation, which stood at 33.95 percent as of May 2024.
Looking at the implication of rising interbank rates, Uche Uwaleke, special adviser to the chairman of the Senate Committee on Banking, Insurance, and other Financial Institutions, said: “It has grave consequences for output and jobs, as capacity utilisation plunges due in part to difficulty in accessing credit by firms whose finance costs will also rise. “Little wonder agriculture and manufacturing sectors’ gross domestic products (GDPs) have been very weak,” he noted.
Interbank call money market allows banks to borrow and lend excess reserves amongst themselves. Overnight loans usually have a maturity of one business day. The interbank call rate can influence other interest rates in the economy.
“Consumer credit is a crucial part of the economy, as it allows people to make purchases and investments that they might not be able to afford upfront. However, it also comes with the responsibility of managing debt and making timely payments to avoid financial difficulties,” said a personal finance expert.
Philip Ikeazor, a member of the Monetary Policy Committee (MPC), said in his personal statement that Nigeria’s credit channel will witness a major boost with the introduction of the N100 billion ($142.86 million) Nigerian Consumer Credit Corporation (CREDICORP).
President Bola Tinubu in April 2024 gave the green light for the launch of the initial phase of the Consumer Credit Scheme.