Nigeria’s financial institutions are experiencing a surge in loan repayment defaults, primarily attributed to the country’s high inflation rate and interest rates. According to Abiodun Keripe, Managing Director of Afrinvest Consulting Limited, the current economic climate is creating significant repayment stress on borrowers. Keripe’s comments follow a recent survey by the Central Bank of Nigeria (CBN), which reported a broad rise in loan defaults across households and businesses in the fourth quarter.
The CBN’s survey identified key drivers of the defaults, including high interest rates, which are eroding disposable incomes due to inflation, as well as high energy and operating costs for firms. The apex bank has maintained a high Monetary Policy Rate (MPR) of 27.5% for most of the year, only recently reducing it to 27%. Keripe noted that the high MPR, combined with inflation and foreign exchange (FX) challenges, is making it difficult for borrowers to repay loans.
The inflation rate, although recently decreased to around 15% from 33%, remains a significant factor in loan repayment defaults. Additionally, FX issues are creating repayment bottlenecks, further exacerbating the problem. Keripe emphasized that the ability to borrow from the banking system is heavily dependent on cash flow and credibility, with collateral being a secondary consideration.
Despite increased credit availability and rising demand for loans, loan repayment defaults continue to spike. The CBN’s survey highlights the need for financial institutions to carefully assess borrowers’ ability to repay loans, taking into account the current economic conditions. As the Nigerian economy navigates these challenges, it is essential for stakeholders to monitor the situation closely and consider potential solutions to mitigate the impact of high interest rates and inflation on loan repayment. The CBN’s decision to reduce the MPR may be a step in the right direction, but its effectiveness in addressing the issue remains to be seen.
