*Impacts productivity, GDP growth, profitability
Dike Onwuamaeze
CFG Advisory says Nigerian banks are charging high interest rates on loans to compensate for the costs of holding high regulatory reserves, which they pass on to their customers via high spreads between lending and deposit rates.
CFG expressed the views in its January 2025 publication, captioned, “Adverse Effects of High-Interest Rate Spreads on The Nigerian Economy,” which was authored by Mr. Mustafa Chike Obi and Mr. Adetilewa Adebajo.
The report defined interest rate spread as the difference between the interest rates charged on loans and the interest rates paid on deposits, and emphasised that the spread had become an area of concern since the Nigerian banking liberalisation regime.
It added that the spread also suggested there were intrinsic and systemic inefficiencies within the Nigerian banking system and distortions in the economy at large.
The report said, “The CBN’s regulatory requirements, especially the high Cash Reserve Ratio (CRR), now at 50 per cent, and the Liquidity Ratio, are impacting the interest rate spread and reducing funds available for lending.
“The AMCON levy, NDIC premiums and the impending windfall tax are also included.
“Banks are charging higher interest rates on loans to compensate for the opportunity cost of holding reserves and passing on all these costs to customers via higher spreads.”
According to the report, “CBN’s monetary policy decisions, such as setting the Monetary Policy Rate (MPR), influences the interest rate spread.
“A higher MPR in the process of taming inflation invariably leads to higher lending rates and a wider spread.”
It added, “In the past years from 2023 to 2025, interest rate spreads for Nigerian banks have on average increased and reached a record high from 6.0 per cent to 19 per cent.
“High-interest rate spreads in Nigerian banks have significant implications for the country’s economy and various key economic indicators.
“High spreads often indicate structural inefficiencies, higher risks, or restrictive monetary conditions, which can hinder economic performance.
“Low spreads reflect a well-functioning, competitive financial system that promotes growth and stability.”
The report stated that high interest rate to deposit spread in Nigeria had significant consequences for GDP growth rates.
It said, “A wide spread is a consequence of high lending rates, relative to low deposit rates, making it more expensive for individuals and businesses to borrow money. This can reduce investment, consumption, and economic growth.
“Furthermore, a high-interest rate spread can also lead to a decrease in deposit rates, making saving less attractive. This can reduce the amount of money available for banks to lend, further exacerbating the problem.”
According to the report, high-interest rate spread has been shown to have a negative effect on the output gap, which is the difference between the actual and potential output of the economy.
CFG said, “A high-interest rate spread can also lead to a decrease in manufacturing output, as high lending rates make it more expensive for manufacturers to borrow money.
“The negative impact on output gap in Nigeria, has decreased manufacturing output as is it more expensive for manufacturers to borrow money, which in turn affects productivity and reduced GDP growth rates.
“Overall, the high interest rate to deposit spread in Nigeria from our research, shows an inverse correlation with GDP growth making it essential for policymakers to address this issue.”
The report said a combination of regulatory, structural and market-based approaches would be required to lower the spread between lending and deposit rates.
It said, “To start, the CBN can play a crucial role by implementing policies that narrow the interest rate spread. This can be achieved by either decreasing lending rates or increasing deposit rates and a review of levies.
“Another strategy is to improve the overall efficiency of the banking system.
“Additionally, the government can also play a role by implementing policies that promote economic growth and stability like investing in infrastructure, promoting entrepreneurship, and implementing policies that attract foreign investment.”
