Interest Rate Hikes: What Nigerian Business Owners Need to Know

The Central Bank of Nigeria (CBN), led by Olayemi Cardoso, for the fifth time this year, raised the monetary policy rate (MPR) from 26.75 percent to 27.25 percent.

An interest rate, to put it simply, is the percentage charged by a lender to a borrower for the use of assets, typically expressed as an annual percentage of the loan amount. CBN, like other central banks in the world, set benchmark interest rates that influence the overall cost of borrowing within an economy.

The reason for the latest increase, according to the CBN Chief, was to fight off inflation, which, although has slowed down in the last two months, dropping from 34.19 percent in June to 32.15 percent in August according to the latest data from the National Bureau of Statistics (NBS), remains incredibly high for Nigerians.

“We are not out of the woods yet; we really cannot take any chances,” said Cardoso, adding that the move “would enhance the economy’s competitiveness for international capital, thereby improving exchange rates.”

The increase in Nigeria’s interest rate by the country’s apex bank, coming at a time when other nations are lowering their borrowing costs, has raised concern among financial experts about how this will affect business activities in a country where access to capital remains one of the major issues for business owners.

“Countries are cutting down interest rates, so it was expected by many financial experts that Nigeria would also cut rates. However, Nigeria has had to increase the MPR by 50 basis points,” financial expert Emmanuel Adepelumi told Neusroom.

Adepelumi explained that the increase in energy prices, following the release of the much-anticipated Dangote petrol to the market, was the reason behind this surprising hike in the interest rate, as high energy costs might cause a surge in inflation in subsequent months.

Recall that on September 15, Dangote Refinery began delivering petrol to Nigeria, which the country’s state-oil company said it would sell at N950 in Lagos, and above N1,000 in many parts of the country. However, it was clarified that the September purchased petrol was refined from Dangote’s previous crude purchase from the U.S., making the transaction conducted in dollars.

“The immediate effect of this increase in the interest rate,” explained Adepelumi, “is that the cost of money has become higher. Hence, it will be difficult for businesses to access loans because interest on loans will now come at a very high rate.”

He continued: “Some of these businesses need to seek loans to scale, while others are already running on capital loans. Banks are going to revisit some of these loans and charge higher rates.”

Damilare Akanni, another financial analyst with one of Africa’s growing companies, explained that the increase in the interest rate now might not achieve the intended result of mitigating inflation.

“They should have known by now that Nigeria’s inflation stems from petroleum—not necessarily because there’s too much naira in circulation.”

He continued: “Raising the MPR is usually necessary when you want to curb inflation caused by too much money in circulation. This discourages people from borrowing. Hence, there would be no excess money in circulation because they have to pay interest on their loans.”

However, increasing borrowing costs at a time when 8 million businesses shut down in a single year might stifle the survival of enterprises in need of capital to scale.

“But now, increasing the MPR at this moment will make the economic situation difficult,” Akanni said. “People who want to borrow money for their businesses to increase production would not be able to do so because of the high interest rate.”

However, with Dangote Refinery expected to receive crude in naira—and with the refined products, particularly petrol, to be sold back to the NNPC in naira—the price of the commodity is expected to drop, bringing relief to the price of goods in the market.

“If this happens,” explains Adepelumi, “the CBN might have to reduce the MPR or maintain it as it is.

“But for now, the effect of this increment is on Nigerians, basically. Businesses, especially SMEs, will be affected the most.”