US embassy cable - 02ABUJA3101

UNCLAS SECTION 01 OF 02 ABUJA 003101 
 
SIPDIS 
 
 
SENSITIVE 
 
 
E.O. 12958: N/A 
TAGS: EINV, ECON, PREL, PGOV, NI 
SUBJECT:  NIGERIA: "VOLUNTARY" CAP ON INTEREST RATES 
UNPOPULAR WITH BANKERS 
 
 
1.  (SBU) Summary.  Most bankers see the October Bankers 
Committee "voluntary" agreement to cap interest rates at 22.5 
percent as neither sustainable nor truly voluntary.  Some 
industry insiders view the move as politically motivated. 
The Central Bank and the Bankers Committee endorsed the 
ceiling when the Minimum Rediscount Rate (MRR) dropped but 
presidential suasion failed to cause a corresponding 
reduction in commercial rates.  Despite the unease, sources 
predicted most banks would adhere to the new regulation and 
manage to weather an estimated three-month period of less 
than expected, and even negative returns of as much as 8-10 
percent.  (Note: Most deposits in Nigeria are on a 90-day 
basis.)  This new development may separate the strong from 
weak banks and increase the rate of failure among the weaker 
institutions.  End Summary. 
 
 
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Background 
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2.  (U) President Olusegun Obasanjo made a surprise 
appearance at the April Bankers Committee meeting to appeal 
for reduced lending rates to spur economic growth.  Cheaper 
credit would stimulate the non-oil economy, the President 
argued.  The Bankers Committee created a sub-committee to 
explore reduction of lending rates.  Despite considerable 
political jawboning and a reduction in the MRR, there was no 
significant immediate drop in interest rates as a result of 
the Presidential entreaty. 
 
 
3.  (SBU) However, continued pressure seems to have paid off. 
 At the October Bankers Committee meeting, Chief Executive of 
Zenith International Bank Ltd. Jim Ovia, announced a rate 
reduction from an average 35 percent to 22.5 percent.  He 
confirmed the banks had agreed to cap lending rate at 400 
basis points above the CBN,s Minimum Rediscount Rate (MRR), 
currently 18.5 percent. 
 
 
 
 
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BANKS HAVE NO CHOICE BUT TO IMPLEMENT 
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4. (U) Executive Director of Guaranty Trust Bank, Plc. (GTB) 
Farouk Bello believes most banks will implement the new rate, 
despite inevitable short-term losses. The agreement came 
after CBN directives reducing the MRR from 22.5 to 18.5 
percent and the Cash Reserve Ratio from 12.5 percent to 9.5 
percent. 
 
 
5. (SBU) Bello estimates GTB will incur monthly losses of 
Naira 50 to 80 million over the next quarter as his 
certificates of deposits paying 25 to 28 percent expire.  GTB 
operations are profitable, and he believes the bank will 
adjust by tightening its belt and charging higher service 
fees to partially offset the interest losses.  Some smaller, 
less professionally run banks, he speculated, may circumvent 
the guidelines because they cannot sustain losses.  "Some of 
these smaller banks have a negative net worth.  Despite the 
CBN's recent get-tough policy, the Government has no interest 
in taking over bankrupt banks and depleting Nigerian Deposit 
Insurance Corporation (NDIC) reserves," Bello asserted. 
 
 
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AVOIDING THE CAP: IF YOU CAN,T GO UP, GO AROUND 
--------------------------------------------- -- 
 
 
6.  (SBU) Many banks may try to skirt the lower rates by 
putting special conditions on new loans.  When interest rates 
were capped in the early 1990s, many banks required borrowers 
to deposit a portion of the loan in a non-interest bearing 
special account for the life of the loan, effectively raising 
the real interest rate.  Bello assured Econoff that even if 
some mechanisms were proscribed, bankers would quickly find 
new ways to circumvent the rate ceiling.  When asked why the 
Bankers agreed to something they apparently disliked, Bello 
claimed the CBN was prepared to unilaterally set the ceiling. 
Politically, the banks were better off agreeing.  (Comment: 
The cap also can be circumvented by increasing fees and 
associated processing charges on loans. End Comment). 
 
 
 
 
7.  (U) There is widespread skepticism among bankers that 
lowering interest rates will stimulate the manufacturing and 
agricultural sectors.  Bello believes likely beneficiaries 
will be importers and traders, currently the main consumers 
of bank credit.  Banks in Nigeria deal almost exclusively in 
short-term credit for 90 or 180 days.  For the manufacturing 
or large-scale agriculture to benefit loans would have to be 
of much longer duration. Bello thought promoting industrial 
development would best be done by subsidizing credit through 
the Bank of Industry (BOI) and the Nigerian Agricultural 
Credit Bank.  He claims merchant and commercial banks such as 
his play a minimal role in this area. 
 
 
8.  (SBU) COMMENT: The Nigerian economy and financial system 
have been relatively resilient, toughing it out during this 
lean revenue year.  The new interest rate ceiling may test 
the strength of some banks and the regulatory capacity of the 
Central Bank of Nigeria to enforce it. Sustainability of the 
new rate will greatly depend on the interplay of monetary and 
fiscal policy and the perception of the business sector. 
Cheap credit could lead to greater production, a fall in 
prices, and even a reduction in inflation.  This would, 
however, depend on government pursuit of a prudent fiscal 
policy that minimizes deficit spending and earmarks 
discretionary spending to productive sectors such as 
agriculture.  Also, government and the CBN will have to take 
additional steps to convince the business community that they 
want to encourage increased production.  The private sector 
must also be assured that the interest rate ceiling is real 
and something the GON wants to sustain. However, the 
convergence of these policies and actors will be a challenge 
to the GON and its economic policy apparatus. If the rate 
cannot be sustained as a part of an integrated economic 
stimulus strategy, it may end up being short-sighted, and 
ultimately counter-productive. END COMMENT 
JETER