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Cablegate: Nigeria: "Voluntary" Cap On Interest Rates

This record is a partial extract of the original cable. The full text of the original cable is not available.

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.


----------
Background
----------
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.


-------------------------------------
BANKS HAVE NO CHOICE BUT TO IMPLEMENT
-------------------------------------
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.


--------------------------------------------- --
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

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