Posted by 
Nigeria’s historically high interest rate spread —now at 16%— is significantly hindering economic growth, with a 20-30% drag on GDP, according to financial experts Mustafa Chike-Obi, Chairman and CEO of the Bank Directors Association of Nigeria, and Adetilewa Adebajo, CEO of CFG Advisory.
Speaking in an Arise News interview on Thursday, they attributed the problem to excessive regulatory constraints, particularly the Cash Reserve Ratio (CRR), which forces banks to deposit 50% of their funds with the Central Bank at zero interest.
They warned that unless structural reforms are implemented, rising financing costs will continue to stifle business growth and increase Nigeria’s dependence on imports.
Chike-Obi clarified that their report was not aimed at solving all of Nigeria’s economic problems but rather at pointing out the detrimental effects of high-interest rate spreads.
“This report by Tilewa and I is not an attempt to solve all the current problems of Nigeria; we are not trying to solve inflation in Nigeria. What we are trying to do is to point out that there is a significant drag on economic growth.
“We guess it’s at least a 20-30% drag on GDP because we have an interest rate spread, which is the difference between what banks pay for deposits and what they lend to bank customers,” he explained.
He noted that the spread in Nigeria is currently at a historic high. “We believe that the impact of that spread would be a significant drag on GDP no matter what else we do,” he added.
Adebajo emphasised that their research, spanning from 2009 to date, revealed that Nigeria’s interest rate spread is currently at an all-time high of 16%.
“If you take a look at this consistently over the years, Nigeria has had the highest interest rate spread in the world,” he said.
He attributed this to systemic challenges, particularly inflation, adding, “That is why we need to be able to push rates up high in an effort to drive inflation, but again, this is not an inflation discussion.”
Addressing the root causes of Nigeria’s high-interest rate spread, Chike-Obi pointed to regulatory requirements, particularly the Cash Reserve Ratio (CRR), as the most significant factor.
“The biggest impact on that interest rate is the regulatory requirements, and it’s the CRR. Nigeria has the highest Cash Reserve Ratio in the world at 50%. The next to Nigeria is Turkey at 25%,” he stated.
He explained the effect of this policy on banks. “What this simply means is that for every Naira deposit the bank gets, they must give half of it to the CBN at 50%, at 0% interest rate,” he said.
“So what we do, if we are going to take a deposit that we should pay 20% for, we pay 10% because we are giving half of it to CBN. That’s the biggest impact on the interest rate spread.”
Adebajo reinforced this argument, stating, “One of the things we should also understand is that even if the rate were like 20%, if the spreads are high, it’s also not to an advantage.”
He added, “It’s not about high-interest rates; it’s really about managing the spread.”
Adebajo stressed that Nigeria lacks a systematic approach to managing interest rates, leading to structural deficiencies.
“The systematic approach is really what is missing in Nigeria, and because you don’t have the approach, you have a lot of structural deficiencies within the system that cause these distortions that ultimately impact interest rate spreads,” he said.
He called for a more orthodox approach to fiscal policy, noting that its mismanagement directly affects the economy.
“It’s important for us to have an orthodox approach to be able to manage not only our fiscal policy, which invariably impacts that,” he stated.
“We need to be able to have a balance in terms of how we manage the economy to be able to have a stable environment.”
Chike-Obi warned that Nigeria’s heavy reliance on imports will continue to grow if financing costs remain high.
“In two years from now, our import dependence will be increasing because we are no longer making things—because we can’t afford to make them. The highest cost of doing business is financing cost,” he said.
He also pointed out that Nigerian banks face excessive taxation, stating, “Nigeria’s banks are the most taxed institutions in the world. All those taxes may make sense individually, but together, they don’t make sense—that’s the point we are fighting.”
Addressing the perception that banks make excessive profits, Chike-Obi argued that while banks have the ability to pass costs on to customers, the real issue is their impact on businesses.
“Banks are the only institutions with unlimited liabilities to pass costs on to their customers,” he said.
“The fact that banks are making money is not necessarily a bad thing for the economy, but what is bad for the economy is that banks are stopping their clients from making money—because that affects the economy.”
Adebajo concluded that economic and monetary policy coordination is necessary to restore balance and foster inclusive growth.
“What we are looking to do with monetary policy and economic policy coordination is to go back to that balance so that you have a rate whereby everything works out for investors, bankers, and manufacturers,” he said. “Clearly, with these sorts of spread rates, you are going to impact growth.”
Boluwatife Enome
The post Nigeria’s 50% Cash Reserve Ratio Driving High Interest Rate, Warn Experts Chike-Obi, Tilewa Adebajo appeared first on Arise News.
