By Ifeanyi Onuba, Abuja Thursday, 27 Jan 2011

Strong indications emerged on Wednesday that the Central Bank of Nigeria might ask Deposit Money Banks to increase the interest rate on all savings deposit accounts.

Our correspodent gathered, shortly after the two-day Monetary Policy Committee meeting, that members of the committee had noted with serious concern the existing low rates on savings deposits and its implications for financial intermediation.

It was learnt that the committee also noted that the savings deposit rate, which was about one per cent, was not in line with the apex bank’s quest to mobilise long-term funds.

The committee, therefore, emphasised that, in preparation for the removal of the CBN’s guarantee on inter-bank market, banks needed to provide reasonable incentives for the mobilisation of savings for growth and financial inclusion.

The CBN Governor, Mr. Lamido Sanusi, who confirmed the development shortly after the meeting, noted that the weighted average savings rate had declined consistently from 3.33 per cent in January 2010, to 1.51 per cent in December 2010.

He said, “The consolidated deposit rate initially declined from 6.13 per cent in January to 2.07 per cent in September 2010, but rose marginally to 2.24 per cent in December 2010, thus making the spread between the average maximum lending rate and the consolidated deposit rate to widen from 17.05 per cent in January to 19.76 per cent in December 2010.

“The committee noted with concern the extremely low returns paid to savers and depositors as this poses a major dis-intermediation risk and is inconsistent with developmental goals of financial inclusion.

“The committee, however, stated its commitment to monitoring developments with a view to coming up with appropriate measures to address the issue.”

The indication of an increase in the savings deposit rate came just as available data obtained from the apex bank indicated that the retail lending rates of DMBs remained relatively high in 2010.

The average maximum lending rate declined from 23.18 per cent in January 2010 to 21.86 per cent in December 2010.

Similarly, the average prime lending rate also declined steadily from 18.38 per cent in January to 15.74 per cent in December 2010.

However, the inter-bank and Open Buy Back rates moderated to 8.06 per cent and 6.86 per cent, respectively, in December 2010.

Similarly, growth in aggregate credit to the domestic economy (net) was at 6.13 per cent in December 2010, compared with 59.6 per cent recorded in the corresponding period of 2009.

The development, according to the CBN, is connected to the damaged balance sheets of the DMBs in the wake of the global financial and economic crises.

However, aggregate credit to the federal, as well as the state and local governments, grew by 67.83 per cent and 19.17 per cent, respectively, in 2010.

Credit to the private sector contracted by 4.92 per cent in contrast to the indicative benchmark growth of 31.54 per cent for 2010.

Source: Punch