A study conducted by Investmentfrontier.com showed that four of the six countries with the world’s highest interest rates are in sub-Saharan Africa with Nigeria having the highest.
Other countries with high interest rates include: Malawi, Gambia and Ghana, and they reflect the broad picture in the region – and, indeed, the wider African continent – of generally high interest rates.
The base rate for Nigeria is 14%. In contrast, that of Kenya is 10% and that of South Africa is only 6.75%. In Tanzania, the interest rate is 8.91 percent from 9.50 percent.
Banks in Nigeria factor in the high cost of doing business and set their lending rate at 25% or more. The CBN has kept the benchmark rate at 14% as a way of checking inflationary pressure.
There is an inverse relationship between interest rates and inflation. When interest rates are reduced people are able to borrow more and spend more and this leads to an increase in inflation rate.
On the other hand, when interest rate is high, inflation is checked because people are discouraged from borrowing and thus spending is reduced. The second way in which inflation affects interest rate is that banks cannot fix their lending rate lower than the inflation rate else they run at a loss. Since he inflation rate in Nigeria is currently 15.37%, this means that the lending rate cannot be lower than this.
The cost of doing business is high in Nigeria. For banks these include the costs associated with defaults, high speed broadband internet and technology, running the branches including cost of diesel to power the generator and the cost of security personnel for the branches.
Financial intermediation costs include administrative costs incurred by banks, cash reserve requirement (CRR) and liquidity ratio requirement. We have already established that administrative costs are high for banks because of the high cost of doing business.
The cash and liquidity ratio requirements are also high at 22.5% and 30% respectively. The high intermediation cost incurred by banks is reflected in high interest rates charged to borrowers.