On September 1, 2020, the Central Bank of Nigeria (CBN) in a circular signed by Director of Banking Supervision, Mr Bello Hassan, said interest rate on savings deposit in banks will be 1.25%. The rate was cut from previous 3.9% and this was greeted with criticisms from various sections, including the Nigerian Economic Summit Group (NESG), which questioned the rationale behind this policy.

The issue generated such reactions because it was at the time the FG approved increase of electricity tariff, and few days later, pump price of fuel jumped to N160 per litre from N145. One of the major reasons for the grumbling was that these policies were coming when citizens were just reopening their businesses. They had not been economically active for months because of closure due to the COVID-19 pandemic.

But CBN, while reacting to comments made by NESG, questioned the group’s credibility, especially under its current leadership, saying it “has fallen short of its own standards and become a shadow of its old self.” The apex bank explained that it reduced interest rate on savings deposits for the good of the economy, noting that some big companies, instead of expanding operations to hire more workers, were putting funds in banks to generate more money.

Recently, the National Bureau of Statistics (NBS) said that over 27 million Nigerians were jobless in the country.
The apex bank said in order to address this unemployment issue, it had to discourage dumping of funds in banks to yield interest rather than pumping them into the economy to improve economic activities, which will then make the nation’s Gross Domestic Product (GDP) grow positively.

Business Post reports that in the second quarter of 2020, Nigeria recorded negative GDP growth of 6.1% and this was attributed to the global health crisis, which brought the economy almost to a standstill. In the CBN’s response to NESG’s allegation of “price fixing” for savings deposit in the country, the banking industry watchdog said in an “ideal economic textbook/theory, savings should be equal to investment, we expect total deposits should closely mirror total loans.”

CBN in the response signed by its spokesman, Mr Isaac Okorafor, said it observed “an increasingly large gap between total deposits in the banking system and total credit to the economy” which necessitated the 1.25% interest rate benchmark. According to the bank, while total deposits stood at about N25 trillion in January 2020, total loans stood at N17 trn and as of August 2020, the total deposits jumped to N29.7 trn, while total loans were only N19 trn.

“Many rich corporates have simply been content saving their cash balances and collecting huge interest payments, rather than expanding their investment, which should lead to hiring more people and producing more goods. In order to forestall continuation of this trend, CBN had to act to discourage these practices for the good of the economy.

“In other words, the rationale for reducing saving rates by banks is actually to encourage more lending,” the CBN said in the statement.

SOURCE (abridged): https://businesspost.ng/economy/why-interest-rate-on-savings-deposit-was-cut-to-1-25-cbn/amp/

Loan interest not reduced...