Economic experts have warned that Nigeria’s widening interest rate spread—the difference between loan and deposit rates in banks—could slow down the country’s GDP growth by as much as 30%. This growing gap is making it more difficult for businesses to secure credit, while also diminishing household purchasing power.
Tilewa Adebajo, CEO of CFG Advisory, and Mustafa Chike-Obi, Chairman of the Bank Directors Association of Nigeria, highlighted these concerns during a discussion on Arise TV.
“Nigeria has one of the highest interest rate spreads in the world. This issue has persisted since 2009, largely due to systemic economic challenges, particularly inflation,” said Adebajo.
According to CFG Advisory, between 2023 and 2025, interest rate spreads in Nigerian banks rose from 6% to 19%, marking a record high.
How High Interest Rate Spread Affects Businesses and Consumers
Interest rate spread represents the gap between what banks charge on loans and what they pay on deposits. A wider spread means higher borrowing costs for businesses and individuals, making it harder to access credit.
As Africa’s largest oil producer, Nigeria is already grappling with rising inflation and high lending rates, which are slowing business expansion and investment.
Chike-Obi explained that even a 500,000 barrels-per-day increase in oil production wouldn’t be enough to fix the economy if interest rate spreads remain this high.
“The biggest issue is that businesses can’t borrow, and consumers have no incentive to save due to the extremely low savings rate,” he said.
“If we could bring interest rate spreads below 5%, our GDP could be up to 30% larger.”
CBN’s Monetary Policies and Their Impact
At its November 2024 Monetary Policy Committee (MPC) meeting, the Central Bank of Nigeria (CBN) raised the key interest rate by 25 basis points to 27.5%. Other regulatory measures include:
- Cash Reserve Ratio (CRR) for Deposit Money Banks (DMBs) at 50%
- CRR for Merchant Banks at 16%
- Liquidity ratio maintained at 30%
Experts argue that Nigeria’s CRR (50%) is the highest in the world, followed by Turkey at 25%. This policy forces banks to park half of every naira deposit with the CBN, limiting their ability to lend.
“If a bank offers a deposit interest rate of 20%, it effectively pays just 10% because the other half is locked at the CBN without earning interest. This has a major impact on the cost of borrowing,” Chike-Obi explained.
Economic Consequences of a High Interest Rate Spread
- Reduced Investment: Businesses find it harder to expand due to expensive credit.
- Limited Access to Loans: Small businesses struggle to obtain financing, slowing economic growth.
- Higher Inflation and Import Dependency: With fewer local investments, Nigeria increasingly relies on imported goods, putting further pressure on the naira.
Chike-Obi warned that within the next two years, Nigeria’s import dependence will rise further, making the country more vulnerable to currency fluctuations.
“Banks are not lending to critical sectors like construction, manufacturing, and SMEs. Instead, they focus on short-term loans for sectors like petroleum imports, which limits long-term economic growth.”
Can Nigeria Generate More Foreign Exchange to Stabilize the Economy?
Adebajo emphasized the need for innovative solutions to boost dollar inflows and support the naira. Without increasing foreign exchange supply, Nigeria’s 2025 economic outlook remains uncertain.
CBN Governor Olayemi Cardoso recently stated that monetary tightening prevented inflation from reaching 42.8% in December 2024, keeping it at 34.8% instead. However, he acknowledged that past liquidity injections—especially during the COVID-19 pandemic—created economic distortions that fueled inflation.
The CBN’s latest reforms include:
- Unifying multiple exchange rate windows for better FX market efficiency.
- Clearing a $7 billion FX backlog to restore investor confidence.
- Introducing a new FX Code to ensure transparency and stability.
A Shift Toward Economic Stability?
As Nigeria moves toward more traditional monetary policies, Cardoso believes the economy is turning a corner.
“We’re seeing improved FX liquidity, better market stability, and a naira that is gradually aligning with economic fundamentals,” he said.
While reforms are showing early signs of progress, experts caution that unless interest rate spreads narrow, Nigeria’s economic growth will remain constrained—potentially holding back GDP by up to 30%.
