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HIGH INTEREST RATE SPREADS: A SILENT KILLER OF NIGERIA’S ECONOMIC GROWTH By Mustafa Chike Obi & Adetilewa Adebajo



Event Diary LifestyleFebruary 01, 2025

HIGH INTEREST RATE SPREADS: A SILENT KILLER OF NIGERIA’S ECONOMIC GROWTH By Mustafa Chike Obi & Adetilewa Adebajo


For businesses and individuals in Nigeria, accessing credit has long been an uphill battle. The cost of borrowing remains exorbitant, with interest rate spreads—the difference between what banks charge on loans and what they pay on deposits—reaching record highs. Between 2023 and 2025, these spreads have surged from 6% to a staggering 19%, far exceeding those of peer economies in Africa and beyond.

This persistent issue reflects deep-seated inefficiencies in the Nigerian financial system, fueled by stringent regulatory policies, liquidity constraints, and high credit risks. While banks remain highly profitable, businesses and consumers are left struggling to secure affordable credit, hampering economic growth and financial inclusion.

In this report, we examine the root causes of Nigeria’s high-interest rate spreads, their far-reaching impact on the economy, and potential strategies to bridge the gap.

Why Are Interest Rate Spreads So High?

1. Regulatory Costs Driving Up Lending Rates

One of the primary factors behind Nigeria’s excessive interest rate spreads is the heavy regulatory burden placed on banks. The Central Bank of Nigeria (CBN) enforces a 50% Cash Reserve Ratio (CRR)—one of the highest in the world—meaning banks must keep half of their deposits locked up and unavailable for lending.

Additionally, financial institutions must pay levies such as the Asset Management Corporation of Nigeria (AMCON) charge, Nigeria Deposit Insurance Corporation (NDIC) premiums, and a cybersecurity tax. These costs are ultimately passed on to customers in the form of higher lending rates.

2. Tight Monetary Policy and Inflation Control

In an effort to combat inflation, the CBN has consistently kept the Monetary Policy Rate (MPR) high, making borrowing more expensive. While this policy aims to stabilize the naira and curb inflation, it inadvertently widens interest rate spreads, discouraging investment and slowing down economic activity.

3. Poor Liquidity and High Credit Risks

Nigerian banks face significant liquidity challenges, limiting their ability to offer competitive rates. Furthermore, the prevalence of non-performing loans (NPLs) forces banks to charge a risk premium on new loans, making credit even more expensive.

The Ripple Effect on the Economy

High-interest rate spreads do not just hurt borrowers—they weaken the entire economy.

1. Strangling Small Businesses and Startups

For many Nigerian entrepreneurs, securing a bank loan is nearly impossible. With lending rates often exceeding 25% per annum, small and medium enterprises (SMEs) are forced to rely on alternative, informal lenders or scale back their growth plans. This limits job creation and stifles innovation.

2. Increased Cost of Doing Business

High borrowing costs mean businesses must spend more on servicing loans, leading to increased operational expenses. This reduces profitability and erodes Nigeria’s global competitiveness.

3. Slower GDP Growth and Reduced Investment

Studies show a direct correlation between high-interest rate spreads and sluggish Gross Domestic Product (GDP) growth. When credit is expensive, businesses invest less, leading to reduced productivity and slower economic expansion.

4. Widening Income Inequality and Financial Exclusion

High lending rates disproportionately affect low-income households, preventing them from accessing credit for education, healthcare, or business opportunities. This deepens financial inequality and slows poverty alleviation efforts.

What Can Be Done?

1. Lowering Cash Reserve Requirements

Releasing 20-25% of CRR funds for lending to critical sectors at a maximum rate of 20% could boost economic productivity and job creation.

2. Rationalizing Banking Levies and Taxes

A review of statutory costs—such as the AMCON levy, NDIC premiums, and emerging windfall taxes—would reduce the financial burden on banks, allowing them to lower interest rates.

3. A More Coordinated Approach Between Policymakers

The Nigerian government must align its fiscal, monetary, and industrial policies to create a more stable economic environment that encourages lower borrowing costs.

4. Increasing Competition in the Banking Sector

Encouraging the entry of more financial institutions, fintech lending platforms, and digital banks could drive down interest rates through competitive pricing and efficiency.

Conclusion: A Call for Urgent Reform

If Nigeria is to unlock its full economic potential, the issue of high-interest rate spreads must be tackled head-on. A more competitive, transparent, and inclusive financial system will not only make credit affordable but also drive investments, create jobs, and enhance economic prosperity.

The solution lies in policy reform, regulatory easing, and technological innovation. If decisive steps are taken, Nigeria can move towards a more sustainable economic future—one where businesses thrive, individuals prosper, and financial barriers are broken down.

The time for action is now.

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