Guaranty Trust Bank, Nigeria’s largest bank by market capitalization, has crashed its interest rate for its ‘quick credit’ facility from 1.75% to 1.33% per month. The bank reviewed its rate, which is published on its website, as it becomes one of the lowest in the lending space.
Banks on the offensive: In a growing sign of competition in the lending space, Nigerian banks have been playing catch up to their more nimble FinTech counterparts. While more financially robust banks focussed on pouring money into treasury bills and government securities, FinTechs and Microfinance Banks ramped up retail lending.
Nigerians are already used to targeted ads via SMS and across social media platforms offering quick loan incentives such as loans without collateral or lengthy applications previously characterized by lending in Nigeria. Commercial Banks have now joined the fray, albeit with a bit more caution.
Banks are now extending these loans beyond employees in structured organizations and now comfortably offer the same to self-employed Nigerians. However, unlike microfinance banks and quick loans banks, you will have to open an account with the bank.
A survey conducted last year revealed tier 1 banks charged as much as 5% monthly for similar loans. Microfinance Banks such as Page Financials charge as much as 5% monthly. RenMoney another payday loan competitor and one of the pioneers of aggressive lending charges about 2.825% monthly. Some Payday lenders claim their interest rates are free of “hidden charges”.
GT Bank rates appear to be the lowest we have seen so far and could precipitate an interest rate war in an increasingly competitive space. In a sign of the times, ad agencies representing microfinance banks and FinTechs have splashed hundreds of millions on advertising across multiple platforms.
Effects of monetary policy: Last October, the Central Bank of Nigeria shocked the financial markets with a circular that bounced local investors (except banks) off the lucrative OMO market freeing up over N12 trillion of investable funds. As expected, most of the funds flowed into treasury bills clogging up demand and driving treasury bills rate.
At last week’s auction, 91-day treasury bills fell to as low as 2.9% per annum as investors outbidding offer by 10 folds. Banks were also under pressure from an earlier policy that required that they increase their loan to deposit ratios to 65% or face sterilization of their deposits.
This twin move is thought to have triggered a crash in deposit rates and will inevitably drag lending rates for banks. Nigeria’s inflation rate remains stubbornly at double digits and rose to 11.9% in December, rising for the 4th straight month.
With investors facing a lack of secure investments, banks have taken advantage and have also reportedly reduced deposit rates on time deposits in line with market conditions.
Why this matters: GT Bank’s decision to crash rates for its payday loans could be for two main reasons. The bank is adjusting to a drop in interest rates across the board. Also, considering itself the market leader in the retail lending space, it believes it can beat out competition by dropping rates to a level where microfinance and FinTechs will struggle to compete. With this move, we expect other banks to follow suit with their own rate cuts.
This could unlock a new wave of borrowers or increase the volume of borrowing by those seeking personal loans. Quick Money Banks, who issue loans with little to no paperwork, will have to leverage on their ease of disbursement to compete. Stiff competition could also push down loans to more subprime borrowers who may have nothing to lose when they default.