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00:00Resolving the high interest rate to deposit spread in Nigeria requires a coordinated and
00:04balanced approach that involves both monetary and fiscal policy measures.
00:08That's the joint stance of Thilo Adebajo, CEO of CFG Advisory, and Mustafa Atikiobe,
00:12the chair of the Bank Directors Association of Nigeria, in a new report.
00:16They say a release of 20 to 25 percent CRL funds to be directed to lending to critical
00:21real sectors of the economy at interest rates of not more than 20 percent, among other recommendations,
00:26will reduce average lending rates.
00:28Please join me now to unpack their views.
00:30Thank you so much for your time on the show, gentlemen.
00:33And let's get into the conversation here, and I'd like to start with the banker here,
00:37because we're talking about an issue that's got to do with the banks here.
00:40And help us appreciate the severity of the problem that we're looking at here.
00:44We're talking about interest rate spreads here in Nigeria, and we're looking at moving
00:47from about 6 percent to record highs of about 19 percent.
00:50Sir?
00:51Yes.
00:52The interest rate spreads defined is just the difference between where banks pay, what
00:57banks pay for deposits, and what banks lend at.
01:04That rate represents a whole bunch of things for banks.
01:07It represents the economic environment, it represents statutory requirements.
01:13So anything that happens to a bank that's adverse is reflected in the spread widening,
01:18and everything that happens to the banks that's good for the banks, the spread narrows.
01:23But when I say good for the banks, I mean what's good for the banks is, we have found
01:28it's correlated with what's good for the economy.
01:31So when the spread is very narrow, the economy does better, and when the spread is very wide,
01:36the economy does worse.
01:37And if you look at all the countries in the world that have good economies, significant
01:41economies, the spread is extremely narrow, and Nigeria has the highest spread that we
01:46looked at in the world.
01:48Let me get the economy's viewpoint here, because now we're talking about the spread here and
01:52the impact on the economy.
01:53Tell me about from where you sit, looking at an output standpoint, help us appreciate
01:58what's playing out there.
01:59Well, we looked at Nigerian banks against the African banks and also G20 banks over
02:05the last 15 years, and we find out that consistently over the last 15 years, Nigerian banks' interest
02:14rate spreads have been higher than all their contemporaries.
02:19So that reflects an intrinsic structural problem within the Nigerian economy, and that
02:26is impacting not only on the banks that pushes them to increase their spreads, but it's also
02:34impacting GDP.
02:36And when we did the correlation between interest rate spreads and annual GDP growth rates,
02:41we found out there was an inverse correlation.
02:43When interest rate spreads are lower, we experience higher growth rates, also in the
02:48last 15 years in Nigeria.
02:50And when interest rate spreads are higher in Nigeria, we experience low GDP growth rate.
02:56So that correlation is significant.
02:59So that's the findings that we've seen.
03:01It's good to paint the picture here, because then I'd like to get to the root causes, because
03:04yes, it's not a problem that is existing all of itself.
03:07And I'm looking at your report here, you list four key causes here.
03:10You talk about the regulatory requirements, charges and taxes, you talk about the monetary
03:14policy stance, you talk about liquidity and funding, and also the high credit risk.
03:18Would you say that's an increase in order of importance or decrease in order of importance, sir?
03:22Yes, the most important is the CRR, very simply.
03:28If CRR was 100%, there's no banking, there's no lending, there's no deposit taking.
03:32So the spread would be 100.
03:36If CRR was zero, the spread would be narrower, because now we can pay more for deposits and
03:39we have more money to lend and we can charge less for lending.
03:42So that's the biggest impact by far, is CRR.
03:45Now, just to be clear, we're not calling for CRR to be reduced or increased.
03:51That's a policy thing for CBN to decide in the context of monetary policy.
03:55But we're saying that a high CRR will lead to a high spread, and a high spread will lead
04:01to a slow economy.
04:02So CBN has to consciously make the choice to keep CRR at these levels, because the drag
04:08on the economy is significant.
04:10Let me get your thoughts on this as well, on the causes here, because we're looking
04:13at these four key areas which you've listed here, and monetary policy is one which we've
04:18discussed many times here on the channel, and we understand that the underlying factor
04:22there is inflation, and what the central bank is doing, growth and inflation, where the
04:26central bank is trying to find a balance.
04:28Yes, again, there's cause and effect.
04:31And the CRR that you've mentioned, that 50%, is the highest in the world, in Nigeria.
04:37The next to that is Turkey, which is 25%, and Brazil is about 21%.
04:42You have other countries like China and Malaysia as low as 2%, 3%, 4%.
04:48So these are extremely challenging times.
04:51So basically, the indication of a 50% CRR shows that you have some significant challenges
04:56within your economy, and that is why the monetary authorities are reacting in that manner.
05:02So the challenges is the fact that those systemic issues in the economy, we need to begin to
05:07address them, and those challenges we're talking about has to do with coordination
05:12of policy, not only monetary policy, not only fiscal policy, but you have to take a look
05:18at trade policy, industrial policy, and more importantly, investment policies.
05:24Because if you have a situation in Nigeria where your environment is not attractive to
05:29investors, both locally, especially local investors, not to talk about FDIs, and one
05:37of the key sources for Nigeria now is we've lost a lot of foreign direct investments.
05:41FDIs are at an all-time low of maybe less than $500 million.
05:46So that is a big challenge.
05:48Well, there's no problem without a solution.
05:52You know, I'm trying to explore some solutions here, and your report, you say that this would
05:55require that multifaceted approach, and I'd like to get into that as well with you, sir,
06:01because you say the central bank can implement policies that would narrow the spread.
06:04You talk about decreasing lending rates or increasing the deposit rates.
06:07You talk about reviewing levies, and you also talk about improving the efficiency of the
06:10banking system.
06:11And I'd like you to shed more light on this area.
06:14Well, like I say, again, this is not, the paper is not designed to solve all the economic
06:23problems of Nigeria, even though Tilewa loves to solve economic problems.
06:28I just, I'm more about sounding an alarm.
06:31Because there's a lag to this.
06:34Banks today are not lending to any productive industries.
06:38We are lending to oil marketers.
06:41We are lending to import-export traders.
06:46We cannot lend to construction.
06:47We cannot lend to industry.
06:48We cannot lend to manufacturing.
06:49We cannot lend, because you're just asking for NPLs two years down the road at 38 percent
06:56interest rates.
06:57So I'm more of sounding the alarm.
07:01There's a problem here.
07:03We need to look at it.
07:04And we need to look at it, like you said, in a coordinated manner.
07:08You didn't mention petroleum policy.
07:10We need to produce more oil.
07:12But to produce more oil, say 500,000 barrels a day, we need, ask the oil experts, upward
07:18of 20 billion in investments.
07:20So we have to have a policy that encourages that investment to produce more oil.
07:24So what we are afraid of is that brilliant people individually are making their own decisions.
07:32Fiscal makes a decision.
07:33FRS makes a decision, let's tax the banks.
07:39CBM says, let's take money from the banks, I'm going to levy.
07:43So all those things are happening, and they all make sense individually.
07:45But what the problem is, together, together, they don't make sense.
07:51And that's what we're saying, let's coordinate these policies in a way that addresses, that
07:56deals with this, so that we don't deal with it two years from now.
07:58Selom, I'd like to talk about the issue about the inefficiency in the banking system, and
08:03how we can address that, you know, because I'm trying to imagine how Nigeria can address
08:08the inefficiencies here without sacrificing financial stability.
08:12And is there like a trade-off, what's the trade-off there?
08:15Well, the trade-off is not so much of a trade-off, but reaching an optimal level of efficiency.
08:21And of course, there's always cause and effect.
08:24The Nigerian banks are not immune from the increase in fuel prices.
08:30It impacts also their operations.
08:32They're not immune from the lack of infrastructure in the environment.
08:37But I think where we've seen a big advancement with operational efficiencies is in payments,
08:43because it's technology-driven.
08:45And now we're beginning to use technology to drive operational efficiencies.
08:50But when you take a look at that, the distortions in the macroeconomic environment will also
08:55impact on the banks adversely, because as Mustafa had said, because of certain conditions,
09:02the real sectors of the economy will begin to be restricted for funding.
09:07But we must also remember there was a time in Nigeria where inflation was at about 9%.
09:12The economy was growing between 10% to 15%.
09:15And we had some level of macroeconomic stability, which led to our GDP growing to about close
09:20to $700 billion.
09:23But what has happened in the last eight years in the Nigerian economy is that we've seen
09:27our GDP reduce or shrink to about $199 billion, which is $200 billion.
09:34And Nigeria is now the fourth largest economy in Africa, behind South Africa, Egypt, and
09:40Algeria.
09:41So there are certain things we've done in our economy, especially with stagflation,
09:47that has adversely impacted the economic environment.
09:51And of course, that is also going to be reflected on the banking sector of the economy.
09:56Yeah, because sometimes we experience a problem, we know what the causes are, and we can articulate
10:03solutions to these problems.
10:05But sometimes, usually, the devil is in the detail in terms of the approach, how we go
10:08about solving the problem.
10:10And I would love to hear your recommendation in terms of how we'll go about it, because
10:14you say we need a progressive and co-operative policy implementation approach.
10:18Yeah.
10:19And I'd like to hear what that would sound like or look like.
10:21First of all, I don't accept that banks are inefficient.
10:24So this is a discussion between the two of you about banks' inefficiencies.
10:30I think banks are certainly among one of the most efficient institutions in Nigeria.
10:36The only inefficiency we talk about is structural.
10:41You see the telcos struggling to get their tariffs.
10:47So I don't accept that banks are inefficient, but they're not perfect.
10:51But there are inefficiencies within the banking system, which you are trying to address.
10:56Well, it's not the inefficiency in the banking system.
10:59Banks react to circumstances.
11:03Like I said yesterday at my board meeting, I don't know any bank that has failed by not
11:08making enough profit.
11:10Banks fail because of bad loans.
11:13There's a premium on risk on the banking system today.
11:16And so what happens is if you create more risk for the banks, they will react by not
11:21making loans or by not taking deposits.
11:24And that's what's reflected in the spread.
11:26We have the ability to refuse deposits and to refuse to make loans or to make loans at
11:31a high interest rate.
11:33So again, the impact on the economy is that we become more import dependent.
11:38We make nothing.
11:39We import everything.
11:40And if that continues, even the pressure on the FX will continue.
11:44If the pressure on FX continues, you get devaluation.
11:48You get inflation, imported inflation.
11:50So all we are trying to say, there is a problem.
11:54Let us look at it, and let us solve it together.
11:56Talking about solving it together now, I would like to take one of the recommendations that
12:00you listed on the report.
12:01You talk about releasing 20% to 25% CRR funds, which will be directed mainly to the critical
12:06real sectors of the economy at interest rates of not more than 20%.
12:10You said this will reduce the average lending rates and stimulate productivity and increase
12:14GDP growth.
12:15And I'd like you to just speak a little bit more about that.
12:17Just to be clear, this was tried under the Mayfield CBL.
12:21However, it became very abusive and discretionary.
12:26If you had a relationship with the bank, with CBN, you could get your CRR.
12:30So that can be improved upon.
12:32It can be made into a policy where industries know that if I'm in this industry, if I'm
12:38producing, if I'm manufacturing, if I'm in real estate, I can get loans at 20%.
12:46That will encourage people to go into those industries and make those industries more
12:50efficient.
12:51We can improve on it by making it more transparent and more clearly defined.
12:56That's an easy solution that we can implement tomorrow.
12:59It's not inflationary, contrary to what people think, to do that.
13:02It doesn't impact inflation.
13:04Economists may disagree.
13:06But we can do that to start.
13:08But there's a lot of charges that are completely superfluous.
13:12The notion that you can tax a bank and take money from a bank with no consequence to the
13:17economy is not true.
13:19Banks will just simply tax them, they will widen the spread.
13:23We tax them, they'll widen the spread.
13:26There's no coincidence that the best economies have a narrow interest rate spread.
13:30It's not a coincidence.
13:32And so we must keep that in mind when we're doing all these seemingly reasonable things,
13:39but that in the whole are not reasonable.
13:41Father, I thought you wanted to say something.
13:43Well, I think it's true because ultimately the challenge in the Nigerian economy has
13:46been growth.
13:47And as we've seen from this research that we've done, and as Mustafa has pointed out,
13:53in the last 15 years, interest rate spreads in Nigeria have been extremely high.
13:57And we've seen the impact on GDP growth in an economy in stagflation.
14:01Our economy has been in stagflation over the years.
14:04So Nigeria has to return to the 8% to 15% growth rates that we've seen before.
14:12And in doing that, interest rate spreads have to come down.
14:16And of course, this is the direct correlation that we see, that if the government is talking
14:21about a trillion dollar economy, we cannot achieve it with this level of interest rate
14:28spreads.
14:29So and I think that the takeaway is the fact that interest rate spreads, high interest
14:32rate spreads, will not lead to high GDP growth.
14:36For 200 million people in Nigeria, we've seen we've lost our ranking as the highest, biggest
14:41economy in Africa.
14:42Well, the GDP is going to be rebased soon, so we'll get to find out if we're still going
14:47to.
14:48Yeah.
14:49Let's talk about that today.
14:50But all I'm just trying to say is the fact that, you know, the conclusion is the fact
14:56that we've seen a direct correlation between high GDP, high GDP growth will be achieved
15:03only at low interest rate spreads environment.
15:07And that has been proven with the comparison with the G20 countries and even with other
15:12African countries.
15:13All right.
15:15Definitely, definitely quite a lot to digest here.
15:17But I'd love to see this type of collaboration with research coming up and I hope we'll see
15:20more reports of this nature come about.
15:22But thank you so much for your time.
15:23I've been speaking with Tilewa Adebayo, the CEO of CFG Advisory, and Mustafa Aciku will
15:27be the chairman of the Bank Directors Association of Nigeria.