There are indications that banks are widening their interest rate margin apparently to cushion the impact of rising inflation on their operating cost and profitability. This involves raising lending rates and reducing deposit rates.
As a result bank customers now pay higher interest rates on loans while they receive lower interest rate on their deposits.
Latest data by the Central Bank of Nigeria (CBN), on banks’ deposit and lending interest rates showed a 3.15 percentage points increase in the average maximum lending rate to 30.73 per cent in February 2022, as against 27.58 per cent in December 2021.
Similarly, the average prime lending rate rose by 0.10 percentage points to 11.78 per cent in February against 11.68 per cent in December.
On the other hand, the average deposit rate in banks fell by 0.47 percentage points to 4.6 per cent in February from 5.07 per cent in December.
The data further shows that the average interest rate on one-month deposit fell by 0.27 percentage points to 3.46 per cent in February from 3.73 per cent in December. Similarly, average interest rate on 3-months deposits fell by 0.46 percentage points to 4.48 per cent in February from 4.49 per cent in December.
Furthermore, the average interest rate on 6-months deposits fell by 0.26 percentage points to 4.56 per cent in February from 4.82 per cent.
The largest decline in deposit rate occurred on 12-months deposits as the average interest rate fell by 0.95 percentage points respectively to 5.84 per cent in February from 6.79 per cent in December.
The development which indicates general rise in lending rates and decline in deposit rates of banks, led to 3.15 per cent increase in banks’ interest margin.
The increase in interest margin may not be unconnected to the banks’ operating cost to income ratio which shot up by 4.9 percentage points in 2021, and the need for measures to curb this trend.
According to the Banking System Stability Review Report (BSSRR), presented by CBN staff at the last Monetary Policy Committee, MPC, meeting, the operating cost to income ratio of banks rose to 73.1 per cent in 2021 from 68.2 per cent in 2020, driven by the impact of rising inflation and higher AMCON charge.
This implied that for every N100 revenue banks, on average, spend N73.1 on operating cost in 2021, as against N68.2 spent in 2020.