The Lagos Chamber of Commerce and Industry has welcomed the Central Bank of Nigeria’s decision to slash the Monetary Policy Rate by 350 basis points to 23 per cent, but warned that the move will mean little to businesses unless it eventually translates into cheaper and more accessible bank credit.
The Chamber described the reduction from 26.5 per cent to 23 per cent, announced after the 307th meeting of the Monetary Policy Committee, as a significant easing of monetary conditions and a potentially important development for Nigerian businesses.
It identified micro, small and medium-sized enterprises as particularly vulnerable to the high cost of credit that has characterised the Nigerian financial system.
According to the LCCI, lower policy rates can reduce funding costs within the financial system, improve credit conditions and encourage private-sector investment.
However, it cautioned against assuming that the reduction in the benchmark rate would automatically produce an equivalent decline in the interest rates charged by commercial banks.
Lending Rates Now in Focus
For Nigerian businesses, the crucial issue will be monetary-policy transmission — how quickly and effectively the lower CBN benchmark affects the actual cost and availability of loans.
The LCCI said businesses continue to face substantial operating pressures from energy costs, transportation and logistics expenses, exchange-rate risks, rising input prices and infrastructure deficiencies.
These factors can increase the risks associated with lending to businesses even when the benchmark policy rate is falling.
Banks assess more than the MPR when determining whether to lend and what interest rate to charge.
They also consider factors such as borrowers’ cash flows, collateral, credit histories, sector-specific risks, business prospects and repayment capacity.
Consequently, the Chamber warned that the interest-rate cut could have only a limited impact on SMEs unless some of the underlying risks confronting businesses are addressed.
LCCI Wants CBN to Monitor Banks
The Chamber called on the CBN to closely monitor how commercial banks and other financial institutions respond to the new monetary environment.
Particular attention, it said, should be given to changes in lending rates and how much credit flows to productive areas of the economy.
The LCCI also wants stronger credit guarantees, partial-risk guarantees and other de-risking mechanisms that could encourage financial institutions to lend to viable SMEs without undermining prudent banking standards.
The Chamber’s position addresses one of the longstanding challenges confronting smaller businesses: many potentially viable companies struggle to meet conventional collateral requirements.
LCCI consequently recommended greater adoption of cash-flow-based lending, credit scoring, movable assets and alternative forms of security to expand access to formal financing.
Energy, Logistics Costs Remain Obstacles
Interest rates, however, represent only one part of the financing problem.
The Chamber said monetary easing should be accompanied by policies aimed at reducing the structural costs confronting businesses.
It identified unreliable and expensive energy, excessive logistics expenses, infrastructure deficiencies and multiple regulatory charges among the factors weakening companies’ capacity to generate enough cash flow to service loans.
Addressing those problems could reduce the risk banks attach to lending to businesses and potentially improve access to finance.
Chamber Wants Credit Directed to Productive Sectors
The LCCI also cautioned that additional liquidity created by monetary easing should be channelled towards activities capable of expanding output and employment.
It identified manufacturing, agriculture, agro-processing, trade, logistics, technology, healthcare and construction among sectors where increased financing could support productive economic activity.
That distinction is important because an increase in financial-system liquidity does not automatically translate into productive investment.
Where banks remain concerned about risk, they may still prefer lower-risk assets rather than significantly expanding loans to smaller businesses.
‘Credit Transmission Must Be Next Priority’
LCCI Director-General Dr Chinyere Almona said policymakers should not treat the reduction in the MPR as sufficient on its own to resolve the financing constraints facing Nigerian businesses.
The Chamber acknowledged the balance facing the CBN between supporting economic growth and maintaining price and financial stability.
It nevertheless argued that the current easing cycle creates an opportunity to improve the flow of credit into the productive economy.
For SMEs in particular, the Chamber wants lower policy rates to translate into lower lending rates, increased credit supply and appropriately structured financing.
“The current rate reduction provides an important window of opportunity,” the LCCI said, adding that the priority should be turning the monetary-policy shift into business credit, investment, jobs and sustainable economic growth.
The coming months will therefore test whether the substantial reduction in Nigeria’s benchmark interest rate moves beyond the financial markets and delivers meaningful relief to companies facing expensive credit and high operating costs.
