Businessday :: News you can trust

As the year draws to an end, many banks have increased interest rates charged on loans to between 27 and 30 percent from about 20 percent because of the increase in the cost of deposits and the need to shore up their balance sheet position before the end of the year.
Business Day investigations showed that many of the banks are under pressure to raise their own funds for onward lending in an already almost illiquid market.
This has thus led to banks dangling enticing carrots to attract more deposits. The result is that banks are paying higher to get money.
Not even the newly reviewed discount window operations offered by the Central Bank of Nigeria (CBN) will lure banks to approach the apex bank, as lender of last resort for cheaper funds.
The fear is that if the banks approach the CBN regularly for funds, they could be seen as having a confidence problem which has prevented them from raising funds from the open market and thus indicate that all is not well with such banks.
So, even when cost of funds in the market remains high, the banks are not keen to approach the CBN, which is the lender of last resort for fund. 
Emmanuel Abolo, chief economist of Bank PHB said in a telephone chat that what is happening may not only be as a result of the increasing cost of fund, but as well as the cost of running the business amongst others.
He said, the chief cause of the increase in lending rate was the fact that banks were presently shoring up their balance sheets to put them in good standing as the year runs out. This is particularly so for those banks which officially close their financial year on December 31 . 
The implication of this is that, banks will not have enough to lend to one another as each is trying to make its books look good.
This is manifest in the daily Nigerian Inter-Bank Offer Rate (NIBOR) which has continued to rise in the last two to three weeks as a result of illiquidity amongst banks. Not even the maturity of tenured treasury bills has been able to inject reasonable liquidity into the system.
Wale Abe, chief executive officer of the Money Market Association of Nigeria (MMAN) also agreed that the increasing cost of funds is mostly responsible for the increase in lending rates.
According to him, illiquidity continues among banks, while the high cost of funds has to be passed on to the borrowers, as banks are no charity people.
Both Abe and Abolo agree that, though the Monetary Poliy Rate (MPR) is supposed to be an anchor or rallying point for interest rates, the reality on ground is a different thing altogether.
In spite of the reduction in MPR recently by the Monetary Policy Committee (MPC) to 9.75 percent from 10.25 percent recently, a letter sent to a bank’s customer recently said: “As a result of the current happenings in the financial market, inflationary trend in the economy is rising and this has shot up the cost of funds in the market….. We are constrained to inform you of a slight review in the existing interest rate on your account to 28 percent.”