
Nigerian Interest Rate Cut Presents Additional Challenges for Banks, Fitch Warns
Nigeria’s banking sector is facing increased challenges following recent tightening measures implemented by the Central Bank of Nigeria (CBN), as stated by analysts from Fitch Ratings.
Earlier this week, the CBN raised its benchmark interest rate to 14%, the highest rate in a decade, in an effort to combat rising inflation that reached 16.5% in June, a nearly 1% increase from the previous month. This rise in interest rates is expected to further strain the asset quality of several major banks, complicating the situation for borrowers.
Last month, the CBN opted to float the Naira, its struggling currency, to reduce speculative activity in the market. Previously, the bank maintained a fixed rate of 197 Naira to the U.S. Dollar for over a year, despite the Naira trading as high as 370 on the secondary markets.
Since lifting the currency peg on June 15, the Naira has depreciated by more than 60% against the Dollar. Nigeria, the largest economy in Africa, is currently experiencing its most severe recession in twenty years. During the first quarter of 2016, Nigeria’s GDP contracted by 0.36% on an annual basis due to plummeting oil prices. Additionally, several oil facilities have been shut down in recent months due to attacks by militant groups in southern Nigeria, highlighting the oil sector’s significant role, representing about 10% of GDP.
Fitch Ratings indicated that with rising interest rates, excess liquidity in the banking sector is likely to shift towards higher-yielding government debt. However, for domestic banks, government bonds are considered low-risk and low capital-intensive investments, whereas lending in foreign currencies presents greater risks.
Earlier this month, Fitch downgraded several leading banks in Nigeria, attributing the decision to the volatile operating conditions in the country. This downgrade followed their earlier reduction of Nigeria’s sovereign rating to B+ in June. As banks contend with increasing operational costs and diminishing net interest margins, major financial institutions, including United Bank for Africa and Zenith Bank, have had to lay off hundreds of employees in the past year.