High Sovereign Interest Rates Disincentive Bank Lending

This is the economic effect of high “risk free” interest rates…..

GT Bank is reportedly reduced its loan book, why? high default rates on loans. So how will the bank make money? it will invest in FGN sovereign instruments that pay a double digit interest rates eg Treasury Bills

If a Bank can earn 20% “risk free” by investing in FGN Sovereign debt…..then why should it assume any risk by creating risk assets ie loans on its balance sheet?

Thus the CBN high Monetary Policy Rate MPR  and high bond yields offered are a disincentive to commercial bank lending. The Manufacturing and SME sectors will thus see less fresh capital and cannot optimally fund imports and operations.

The way forward is a targeted subsidy via a loan guarantee scheme to offset the risk premium charged by banks. This will allow the CBN perform price stability policies and increase lending.

LAGOS (Reuters) – Nigeria’s Guaranty Trust Bank (GT Bank) plans to reduce loan growth this year to focus on the increased profit to be had from maintaining domestic bond investment levels, its chief executive

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