Thursday, 12 May 2016

Banks, lending and interest rates

Written by the Editorial board of The Guardian Newspaper

The report that some banks, in their 2016 first quarter financial reports, cut interest payment to their customers by as much as N44.0 billion while also collecting more interest charges of N16.8 billion from them is, to say the least, disturbing. For such a development to arise, banks might have increased their lending interest rates while also reducing savings and term deposit interest rates against their customers. Thus, they profited from both sides of lending and deposit transactions, to the detriment of their customers.

It might also have been that the level of borrowing by customers increased while that of interest earning deposits declined. Such a situation will equally arise if the spread between lending and savings rates became wider within the period, or banks deliberately manipulated transactions in their customers’ accounts. Such manipulations result in excess charges which the Central Bank of Nigeria (CBN) has been helping bank customers to recover from the perpetrating banks. For instance, in February this year, CBN informed the public that, in year 2015 alone, it received over 6,000 complaints from customers against their banks and recovered over N6.2 billion excess charges (including interest charges) for them.

It is a well-known fact that Nigerian banks have been very reluctant in lending money especially to the real sector of the economy; and their deposit liabilities have been on the increase for some time now. Consequently, the adverse situation must have been as a result of banks’ manipulation of customers’ accounts on one hand and on the other hand, increase and decrease of lending and savings rates, respectively. The latter further widened the differential between the two rates, thus resulting in customers’ loss of funds to banks. This is the unfortunate reality of what is happening in banks in Nigeria, especially since the deregulation and liberalisation regime. A situation where banks manipulate their customers’ accounts and operate a regime where the deferential between lending and savings interest rates has, over the years been above the upper two digits, is an abnormality.

Whatever the cause, the inherent implications are that first, bank customers have lost a huge sum of N60.8 billion (i.e. N44b + N16.8b) and suffered double jeopardy from bankers they should trust. Secondly, since it was only nine banks that occasioned the huge loss, when the other remaining banks declare their results, the loss will be astounding. Thirdly, banks in Nigeria are mindlessly profit-centric at all cost, notwithstanding the prevailing adverse economic situations their customers and the entire country face.

Situations like this are apparently the reasons, despite propagation and promotion of financial inclusion, many potential bank customers are unwilling to move from the informal to formal sector of the economy. They know from the experiences of their associates, friends and family members that a N1000 deposit in a savings bank account in Nigeria which ought to attract interest income will neither earn the income nor retain its face value; rather, it is likely to be appropriated or misappropriated by the bank, via spurious charges. Unfortunately, this problem in the banking industry subsists, in the main, because of non-adherence to ethical and professional values and tacit support by regulators or weak regulatory oversight.

There have been spirited justifications by banks and even regulators for the wide disparity between lending and savings interest rates in banks. Often cited are the high cost of doing business fuelled by inadequate infrastructure, level of market and borrower risks, as well as regulatory requirements in terms of liquidity, cash reserve and capital adequacy ratios. Yes, these cost-related issues exist but banks do not suffer all of them exclusively. Besides, if banks aim at and work towards effective cost management, the rate disparity will be moderated. With increasing awareness and sophistication of customers as well as the intolerable harsh economic environment, customers will sooner than later begin to ask soul-searching questions.

The glaring evidence of many business closures and financial incapacity to meet basic needs are signs to watch. Another is the reported rising cases of non-performing or bad loans, a greater cause of which is high interest and other charges banks impose on borrowers. Except banks begin to treat their customers fairly, ethically and professionally as partners in progress, they are likely to lose whatever gains they might have made these past many years.

For the country to achieve a banking industry where equity reigns and the confidence of the people in banks to do what is right are upbeat, a re-orientation and re-focusing of banks in the country are important. They should be made to understand that there is no need to cheat the customers. They should also understand that this economy is a developing one with great needs for inclusiveness.

It is also high time some pertinent questions were asked given Nigeria’s level of development. For instance, does this economy support the gigantic and lavishly furnished bank offices, exotic cars, huge emolument pay-outs and personal lifestyle in the banks today?

Perhaps, banks are unaware that most of the people they ought to be dealing with in a developing economy are unlikely to find their lifestyle acceptable.

What is obvious is that Nigeria deserves a home-grown banking system and practices that will take into account the need to carry along a majority of Nigerians in their development process. Banks must support the masses to effect improvement in national productivity. Sustainable development is founded, neither on a regime of high-interest rates nor wide differential between lending and deposit rates. It is also never based on mindless profiteering. The government and the banking sector regulators have a duty to ensure that banks operate within the rules.

Thus, it is their responsibility to ensure that customers get what they deserve so that their wealth is not eroded with sharp practices by the banks.

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