Despite admitting that high interest rate poses the biggest threat to effective business operation in the country, it is sad that the Central Bank of Nigeria (CBN) has not sufficiently addressed it. At its 301th Monetary Policy Committee (MPC) meeting in Abuja, the CBN retained the existing monetary policy rate at 27.5 per cent. The CBN governor, Dr. Olayemi Cardoso, explained that the decision was informed by inflationary pressures, exchange rate volatility, high energy costs, and global economic uncertainties.
The increase in interest rates will promote excess liquidity, which will negatively affect other sectors of the economy. The cost of funding will also increase and slow down business growth, innovation and consumer spending. If the monetary policy of the apex bank will meet its vision of controlling rising prices, stabilising the value of the naira and restoring investors’ confidence, it must tame high interest rates.
A recent report by the CBN revealed that firms see interest rates as their biggest business challenge, with an index score of 75.6 per cent. It is followed by insecurity (75.2%), and poor power supply (74.3%). The survey, which covered 1,900 businesses across sectors, was conducted between June 16 and 20, 2025. It revealed the growing frustration among business owners over high cost of borrowing. Rising interest rates mean that loans, mortgages and credit cards will become more expensive. This also impacts negatively on the amount of money available for people to spend on goods and services.
In extreme cases, hikes in interest rates as a means of combating inflation could trigger recession with dire consequences, which include contraction of economic activities and its adverse effect on the financial markets. It reflects how the present tightening monetary policy of the CBN is biting hard on corporate finances. Business operators are also grappling with excessive bank charges, high taxes, unfavourable economic environment, unpredictable government policies, poor infrastructure as well as uncertain political climate that companies and consumers face.
The development will slow down economic growth and stifle the ease of doing business. Indeed, the cost of doing business in Nigeria remains one of the highest in Africa. The development is not salutary for the manufacturing sector, as the liquidity squeeze is impacting on local production. As a matter of priority, the CBN should lower the interest rates. Doing so will encourage big purchases by consumers and expansion of businesses.
Though the average prime lending rate in the first quarter 2025 was 17.96 per cent in March, a decline from 18.35 per cent in February, the Monetary Policy Rate remains at 27.50%. Currently, the average maximum lending rate charged customers by banks on loans rose to 35 per cent in Q2 2024, up from 28.6 per cent in Q1 2024. It is now over 30 per cent. At this high rate, many businesses are operating at a risk. Moreover, the liquidity in the financial system has deteriorated to N1.7trillion due to lack of significant inflows to ease the shortage of funds in the banks.
The high interest rates can negatively impact the economy by increasing borrowing costs for consumers and businesses, potentially leading to reduced spending and investment. This will make it more difficult for the government to manage its debts. Nigeria’s money supply recorded its worst first decline in Q1 2025, falling to N110.32trillion in February from N110.94trillion in January. The sudden drop in money supply in the banking system, especially in February this year, reflects developments in foreign reserves and domestic credit.
The net foreign assets declined by 8.62 per cent to N32.34trillion down from N35.39trillion in January 2025. Figures from CBN showed that loans to banks surged to an all-time high of N1.2trillion in the first seven days of 2025, indicating a liquidity squeeze in the sector. The N1.2trillion loan to commercial banks represents the highest in five years. Though liquidity fluctuations are common issues in banking, the cost of borrowing and the monetary tightening by CBN is already affecting critical sectors of the economy.
The average maximum lending rate increased to 29.79 per cent in January 2025, signifying high cost of borrowing from financial institutions. The increase in monetary policy rate has sparked concerns about the potential impact on the cost of borrowing. The manufacturing sector has been hard hit by the cost of borrowing. In the first half of last year, members of the Manufacturers Association of Nigeria (MAN) borrowed over N1.8trillion in order to remain in business.
With high interest, the cost of production is pushed to the final consumers. As a result of this, leading manufacturing companies reported over 90 per cent loss in their 2024 financial result. Maintaining interest rates at 27.5 per cent will make it difficult for investors to make profit. The CBN should emulate the US that has periodically reduced interest rates to encourage businesses and consumers to borrow more money. Current interest rate in the US is 4.50 per cent. Ours is very high and must be reduced.
