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Author Name: Omotayo, J. A.
Number of articles: 211
During my time too, there were scholaships, grants and busary awards to students. Some of my friends... (0) Comment

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That Nigeria’s Automotive Policy Does Not Become A Nightmare – 3
Author: Omotayo, J. A. | April 16, 2014

Second, let us examine the issue of interest rate. Between 1970 and 1985, Nigeria used the fixed interest rate policy called Minimum Rediscount Rate or Monetary Rate of Return (MRR). Then interest rate varied from 7% in 1970 to 9.43% in 1985 (See: Nigeria - Lending interest rate, Index Mundi,>Home>Countries>Nigeria). But since 1986, a floating or variable interest rate policy called Monetary Policy Rate (MPR) has been adopted based on promptings from our pseudo-Economic Experts. The rate has since then ranged from 9.96% in 1986 through 31.65% in 1993 to 16.02% in 2011 and now 12% (See: Index Mundi, ibid; See also: Nigeria: Apex bank retains interest rates at 12%, African Manager). Both MRR and MPR respectively were and is the official lending rate by the Central Bank of Nigeria (CBN) to commercial banks. The late Mr. Oladele Omisore, former Managing Director of First Bank of Nigeria, postulated at the last public lecture he delivered at the Institute of International Affairs, Lagos in 1988 that another 2% or more would be required for interbank interest rate and a further 2% or more between banks and customers. He therefore concluded that unless the MRR was very low, it would be a futile exercise for government to expect low commercial bank interest rate to customers as the additions were required to cover operational costs and profit (He was immediately removed from office by the Ibrahim Babangida administration because of this remark). The import is that the lending rate to banks customers is at least 4% higher than the MRR or MPR. Thus when MRR was 7%, actual interest paid by banks customers would be 11%, that of 9.43% becomes 13.43%, and so forth. Today the CBN allows a lending rate at a minimum of 4% higher than the MRR in the commercial banks. For most sectors of the Nigerian economy, the lending rate hovers between 16% and 24%. The prime lending rate in the manufacturing sector attracts 16.5% with a maximum of 24% (See: Is interest rate another ghost hunting Nigeria? Vanguard newspapers online, March 27, 2014,; See also: Interest Rates for Industry, The Minister of Finance, Mrs. Ngozi Okonjo-Iweala was said to have complained of this high interest rate while commissioning a rolling mill at Ilorin, Kwara State (See: Vanguard, ibid). The import is that a N1 million loan with taken in 1970 would attract 11% interest (MRR = 7%) and would only become N2 million in over 6 years (actual value = 6 years 7 months). With 13.43% (MRR = 9.43%) interest in 1985, this would take over 5 years (actual value = 5 years 6 months). With 35.65% (MPR = 31.65%) in 1993, this would take just over 2 years (actual value = 2 years 3 months) while that of 20.02% (MPR = 16.02%) in 2011 would be just over 3 years (actual value = 3 years 9 months). Today at MRR of 12%, the minimum lending rate to manufacturing industries is 20%. Industries rely on long term loans but not short term loans for development (production, research, expansion, upgrading, staff welfare, etc). If an industry has to pay twice the amount borrowed in just over 3 years (the best scenario since 1990s), does this not explain why commercial vehicle drivers get vehicle on hire purchase at prohibitive costs? Does this not explain why there have been so many accidents by commercial vehicle drivers on our roads as a result of their desire to run at high speed to meet repayment terms? Does this not explain why such commercial vehicle drivers would go for second hand vehicles to bring down total cost of the hire purchase? I think they do. Does this not explain why almost all the flourishing motor dealers that were agents to our vehicles assembly plants closed down when the interest rates became high between 1985 and 2013? If accidents bring a motor dealer to his kneel, will he not default in loan repayment and close down the business? Now we have our Lesson 1: The high rate of default in loan repayments in Nigeria which eventually culminated in banks distresses has correlation to high interest rate regime associated with the MPR. The reader may wish to note that although the number of Nigerian banks increased from 54 to 112 between 1986 and 1996, many of them became distressed. There were just about 10 sound banks as at 2006 before the banks consolidation (See: Enyioko N â Impact of Interest Rate Policy and Performance of Money Banks in Nigeria, Global Journal of Management and Business Research, Vol 12, Issue 21, Version 1, 2012). Today, there are still unsound and marginal ones among the 23 operating banks. The less the motor dealers, the less the patronages enjoyed by the motor vehicles assembly plants. The less the patronages the more difficult for the vehicle assembly plants to invest, produce and expand. For instance, the production rate of PAN was reported to have dropped from 31,200 (200 per day) in 2000 to 6,864 (22 per day) in 2010 and further to zero (no production) between 2011 and 2013 (See: Ede, E. C. & Ohwojero, C. â History of Automobile Past and Present Challenges Facing Automobile Production in Nigeria, IOSR Journal of Research & Method in Education, Vol. 2, Issue 4, Jul â Aug 2013, pg. 11-16, We can take our Lesson 2: High interest rate is counterproductive on the long run as it impacts adversely on industries and investments (See also: Eregha, P. B. - Interest Rate Variation and Investment Determination in Nigeria, International Business Management, Vol 4, Issue 2, 2010; Acha, I. A. â Interest rate in Nigeria: An Analytical Perspective, Research Journal of Finance and Accounting, Vol 2, No 3, 2011, Our pseudo-Economic Experts have forced down our throat the theory that high interest rates are required to encourage savings and that savings will boost investments. Unfortunately the scenario in Nigeria does not agree with these postulations. Studies have shown that savings in Nigeria is not correlated to high interest rates as presumed by our pseudo-Economic Experts (See: Eregha, P. B. â op cit; Acha, I. A. â op cit). It has also been shown that when interest rates became high, all the banks switched to short term loans (See: Soludo, C. C. â Issues on the Level of Interest Rate in Nigeria, Central Bank of Nigeria, June 2008). For instance, the value of short term loans (1 â 365 day maturities) by Nigerian banks increased from 88.11% in 2006 to 97.47% in April 2008. Correspondingly, the value of long term loans (over 3 years maturities) decreased from 6.5% to 0.3% respectively (See: Soludo, C. C., Table 1, op cit). Again we learn our Lesson 3: High interest rate is inimical to our commercial banks' interest and it is the reason why they shy away from long term ventures. If long term credit facilities are unavailable for industries to operate, how do we guarantee their sustainability and existence? Does this not explain the second problem faced by our motor vehicle assembly plants? The issue of interest rate is even worse when Micro-Finance Banks (MFBs) are involved. If an MFB borrows at 20% from a commercial bank, it has to add her own operating costs and profit. The capital will then be at 120%. If her operating cost is 10% of the capital, her profit is 15%, government tax is 10%, Value Added Tax (VAT) is 5% giving a total of 40% of the capital borrowed. This implies that a Micro-Finance Bank customer will borrow at 68% (i.e. 120% x 1.4 â 100% = 68%) or 5.66% minimum per month (For further details, See: Otabil, B. â Imagine a world of no interest payments on loans (2), The Mirror newspapers, Ghana, Friday, April 4, 2014, pg. 34, or When Japan wanted to target development, it made interest rate zero for 10 years. China once had zero percent interest rate for 5 years to spur development. All these helped both China and Japan to bring about rapid industrial development. It was the rapid industrial development that culminated in their rapid economic growth. In both the US and UK, interest rate has never reached our 6% level in the last two decades. In fact, as at April 4, 2014 the following were the interest rates charged by some of the leading countries: Federal Reserve Bank in United States of America (US) = 0.25%, European Central Bank (ECB) in European Union (EU â Germany, France, Italy, etc) = 0.25%, Bank of England in United Kingdom (UK) = 0.5%, Bank of Japan (BoJ) in Japan = 0.1%, Bank of Canada (BOC) in Canada = 1%, and Royal Bank of Australia (RBA) in Australia = 2.5%, Peoples Bank of China (PBC) = 6%, Central Bank of Russia (CBR) = 7%, South African = 5.5% (See: Interest Rate â Countries â List â Trading Economics,, Also: ECB refi rate â European Central Bank's current and historic interestâ¦, When there was a global melt down in 2008, the US Federal Reserve Bank engaged in Quantitative Easing, making fund much more available at low interest rate regimes (0.25% - 4.5%). Now we have our Lesson 4: Low interest rate is a prerequisite for development. Will it be possible for any government in Nigeria to compel the Central Bank of Nigeria (CBN) to go back to low Monetary Policy Rate (MPR) or Minimum Rediscount Rate (MRR) of 0 â 5% to spur development in the automobile industry? I think otherwise. Next: Part 1;Part 2; Part 3

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