CBN Rate Cut: SMEs, Real Sector Still Face High Borrowing Costs

Despite the Central Bank of Nigeria (CBN) decision to cut the Monetary Policy Rate (MPR) to 23 per cent in September, the real sector and small and medium-sized enterprises (SMEs) still face high borrowing costs because commercial banks charge high lending rates.

The CBN’s Monetary Policy Committee lowered the MPR in an effort to ease monetary conditions and support  economic activity, while retaining the Cash Reserve Ratio CRR for Deposit Money Banks at 45 per cent.

However, high reserve requirements and other funding costs continue to limit banks’ ability to provide affordable credit to  businesses.

Professor Ken Ife, an economist, argues that the Central Bank of Nigeria’s Cash Reserve Ratio (CRR), on which it pays no interest, forces deposit money banks to charge high interest rates. He explains that if 45 per cent of a bank’s funds are held without earning interest, the bank must increase lending rates to around 35 per cent to achieve a 20 per cent profitability target.

Many SMEs, heavily reliant on bank loans for working capital, equipment, expansion, and payroll, find commercial bank borrowing inaccessible.

Despite a gradual expected influence of the reduced MPR on lending rates, its transmission to the real economy remains slow. Banks maintain high loan rates due to their funding costs, credit risks, operating expenses, and the broader economic environment.

Industry operators said the situation has created a difficult paradox for the real sector and the SMEs: while monetary authorities are taking steps to make credit cheaper, businesses are yet to feel a significant reduction in the cost of borrowing.

“First of all, the CBN has withdrawn 45 per cent of their money as cash reserves ratio CRR, which gives the banks zero interest. And then all the other one that are left that’s 55 per cent the bank is cashing away much from it. They already told them to keep the liquidity ratio at 30 per cent. Then they came with open market operations (OMO and absorbed all the money and gave them a high interest rate. The truth is that the bank doesn’t even have money to lend.”

“And the small amount the banks have to lend, they have to give it at an extremely high price, to be able to cover the fact that the 45 per cent are not giving them any income.

Then the question to CBN is that, why don’t you direct this 45 per cent by way of differentiated cash reserve ratio to use it to incentivise them to lend money to the real sector at single-digit interest rates.” Prof Ife explained.

The high interest rates mean that many small businesses either postpone expansion plans or resort to informal sources of finance, including personal savings, contributions from family and friends, cooperative societies and other alternative lenders.

An SME owner said the cost of bank credit had become difficult to justify, particularly for businesses operating on thin profit margins.

“Even when you qualify for a bank loan, the interest and other charges can make repayment extremely difficult. Many small businesses are afraid to borrow because they may end up working mainly to service the debt,” the operator said.

The development has raised concerns about the ability of monetary policy to stimulate  economic growth if lower policy rates do not translate into more affordable credit for productive businesses.

For SMEs, the consequences extend beyond the inability to secure loans. Limited access to affordable credit can restrict business expansion, reduce investment, hamper job creation and make it more difficult for small enterprises to absorb rising production and operating costs.

Economists have therefore called for stronger transmission of monetary policy measures to the real sector, arguing that a reduction in the MPR would have a greater economic impact if banks were able to extend credit to productive businesses at lower rates.