By Henry Boyo
“Those Micro-finance banks that we have today, are not ‘giving’ loans at single-digit interest rates”; for example, “You borrow N50,000 for 90 days and they expect you to pay another N50,000 interest to them in another 90 days. That is outrageous and that is too exorbitant…” besides, “if you don’t pay the N50,000 interest, they seize your bicycle, or your car or your machine.” (CBN Governor, Godwin Emefiele-see story titled ‘Microfinance Banks Charging Outrageous Interest Rates on Loans”, Punch edition of December 10, 2018).
Governor, Central Bank of Nigeria (CBN), Mr Godwin Emefiele
Indeed, there are several media reports of the deep anguish and oppression endured by patrons of Microfinance Houses, as well as from registered and unregistered lenders nationwide. Incidentally, on May 15 2017, the Punch Newspaper, carried a story titled “Lagos Hairdresser Commits Suicide Over N150,000 Loan;” according to the report, “Yetunde Oladipupo, a Somolu resident, borrowed N150,000 from a Microfinance bank; however, when pressure became too much for her and she could not pay, she became desperate, and bought and drank “sniper” insecticide and died.”
Furthermore, a THISDAY report of April 13 2017, also catalogued an upsurge in suicides and attempted suicides in Lagos. One such attempt, was by a lady, identified as Abigial Ogunyinka, whose reason for wanting to jump off the Third Mainland bridge was that “I owe two Microfinance banks, one N60,000 and the other N90,000, and the banks have been troubling me.” In her own words, “I have looked all through and there is no help, I don’t want further embarrassment.” Fortunately, Abigail’s life was saved by her house help, whom she had taken with her to the bridge as a witness of her planned suicide.
Similarly, in the same THISDAY report, a Lagos based Bank Manager, Mr. Olisa Nwokobi, reportedly also shot and killed himself, because, he was under pressure to repay a huge loan, he had obtained from his bank.
In a related incident, on December 11 2018, the Punch Newspaper carried the story of a N30m loan from a company called “Smart Links Services” in August 2016, to the registered Trustees of the “World Evangelism Incorporated”, for the purpose of Church expansion, with a promise to repay “within 2 months at an interest rate of 30%;” (that is by extension, an outrageous, 180% per annum).
Although, in his Press briefing, in Lagos, on Sunday 9th December 2018, the CBN Governor specifically targeted the oppressive high cost of loans from Microfinance banks, clearly, nonetheless, the larger, and more respectable Money Deposit Banks, are not also free from blame on this matter of very disenabling high interest rates.
Instructively, cost of loans, from Nigerian banks, presently range between 17% to close to 30%! This is in comparison with between 3-7% in more successful economies, where money supply is, more efficiently managed to restrain inflation below a benchmark of say 3%. Invariably, with such high cost of funds, Nigerian businesses would hardly be competitive when compared with countries where businesses can access much cheaper loans. Arguably, business survival is seriously challenged, with 17-30% interest rates, in contrast to below 7% rate in more successful economies, particularly, when critical public infrastructure, which facilitate industrial growth and output, are internally funded.
Furthermore, if Nigeria’s Medium and Large Scale Corporations are clearly hamstrung with loans which attract between 17-30% annual interest, then it would be near impossible, for clearly weaker, small or micro enterprises to survive, with over 10% monthly interest on their loans. The obvious question must be, why poorer, smaller and weaker ‘companies’ pay much more to borrow than much bigger corporations and multinationals? Notably, however, the problem of high and oppressive cost of funds is not, peculiar to the Microfinance or Micro Enterprises subsector, as the CBN Governor would seem to suggest, in his recent Press briefing.
The question therefore, is, why cost of borrowing in Nigeria’s formal and informal money market is, significantly, out of sync with below 7% best practice rates, in more successful economies elsewhere; why is CBN unable to induce single-digit rates for all sectors?
Regrettably, this is a question that no Central Bank Governor or Finance Minister, in Nigeria, has been able to give a satisfactory answer to in almost 20 years!! Indeed, in her answer to the question of high interest rates in a THISDAY interview, some months before the change of Government in 2015, the former Co-ordinating Minister of the Economy and Finance Minister feigned ignorance of why this is so. Although Dr. Okonjo Iweala, promised to interrogate the unyielding challenge of Nigeria’s high interest rates with the incumbent CBN Governor, unfortunately, however, until her government ceased to be in power, Nigerians never got a feedback on this matter.
The preceding might suggest to the uninitiated that high interest rates are independently determined by forces, outside anyone’s control; but, this will be far from the truth. In practice, the prevailing level of interest rate, is usually a direct function of inflation; thus, when inflation rises, the rate of interest on loans will also rise in sympathy. The bottom line, obviously, is that it would be clearly, foolhardy for anyone to lend money at a rate below the inflation rate; instructively, a N1m loan with 10% annual interest rate, for example, would actually turn out to be a loss when N1.1m is paid back, a year hence, when annual inflation rate is 20%; ultimately, the real value of N1.1m received will actually be below N900,000.
The plausible approach to lower interest rates and a more stable investment environment, would be the reduction in the level of inflation. Invariably, the pertinent follow-up question will also be how inflation can be controlled? Instructively, the trigger to inflation is usually learned at the primary level of Economics, that “when more money chases fewer and fewer goods and services, the price level would rise.”
Consequently, the control of inflation, implies control of money supply (both cash and credit) in the money market; invariably, an expansion in money supply, would sustain an inflationary spiral with all the well known adverse consequences on personal income, welfare and savings, and ultimately also, on the level of investment and employment.
Although Emefiele did not suggest how interest rates, across board, for all business segments can be brought down to single-digit, the CBN Governor, however, indicated that, in order to bring cheaper loans to small businesses, which reportedly account for well over 50% of the employed workforce, a National Microfinance Bank would be established directly, under CBN management to induce better and cheaper access to credit, even if, according to him, the applicable interest rate exceeds single-digit and approaches 15% per annum.
Arguably, however, excess money supply will not be efficiently managed, unless CBN stops substituting distributable forex revenue with Naira allocations to government!