Global ratings agency Moody’s Investors Service has warned that Nigerian banks could face shrinking profits following the Central Bank of Nigeria’s (CBN) decision to cut the Monetary Policy Rate (MPR) to 27% from 27.5%. The half-percentage point reduction, announced on Thursday, is intended to stimulate economic growth and reinforce Nigeria’s disinflation trend.
The CBN explained that the policy shift was guided by sustained signs of easing inflation, forecasts of further moderation, and the urgent need to boost credit to the real economy. Policymakers believe the move will encourage more lending to businesses and households, supporting recovery in key sectors battered by weak consumer demand and high borrowing costs.
Moody’s, however, sounded a note of caution. The ratings agency noted that while the cut may support economic activity, it could erode banks’ net interest margins (NIMs)—the difference between interest earned on loans and the cost of funding those loans. Since deposit costs typically adjust more slowly than lending rates, banks could see income from loans and government securities fall faster than their expenses.
According to Moody’s data, net interest income contributed about 62% of Nigerian banks’ operating income in 2024, highlighting their heavy reliance on lending profitability. While the CBN also announced a reduction in the Cash Reserve Requirement (CRR), giving banks slightly more liquidity to lend, Moody’s stressed that this would provide only “partial relief” against the downward pressure on margins.
Industry analysts say the rate cut underscores the delicate balance facing the CBN—managing inflation while also keeping the banking sector stable. For lenders, the challenge will be to increase loan volumes quickly enough to make up for thinner margins. For customers, the development could mean easier access to credit, but it may also raise questions about banks’ long-term profitability in an already volatile economy.
source: punch