Banks decide to seduce savers with a new interest rate
There are indications that more banks have decided to increase their savings rates to woo customers, although the rate increase seems insignificant, it may be a competitive factor.
This follows the recent hike in the Central Bank’s benchmark interest rate known as the MPR by 150 basis points to 13%, for the first time in six years.
Deposit banks should increase the deposit rate for their customers to a minimum of 10% of the key rate.
Over the past few weeks, outflows from the banking system such as cash reserve requirement (CRR), open market operations (OMO), treasury bills (T-bill) and debt auction debits Federal Government of Nigeria (FGN) bonds topped inflows.
Inflows come from sources such as Federation Account allocations to states and local governments, Treasury and OMO bill maturities, and FGN bond coupons, according to a Coronation Research report.
Therefore, the immediate reaction of banks over the past two weeks has been to raise their deposit rates. They also sold short-term liquid instruments such as Central Bank of Nigeria (CBN) Special bonds and short-term treasury bills, leading to a rapid increase in yields.
However, some Nigerian banks are reportedly waiting for their regulator – the Central Bank to give them a directive to raise their deposit rate, more than a month after a monetary policy rate (MPR) hike, according to BusinessDay findings.
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What the banks are doing now is increasing the cost of borrowing. The deposit can follow if customers demand a higher rate. For now, the focus is on raising the borrowing rate. Competition will lead to an increase in the deposit rate. But now the assets at risk are dictated by the CBN’s regulatory stance. Because the MPR has increased, the banks have to increase their rates, because what the CBN has increased is the borrowing rate from the CBN. If the CBN doesn’t tell the banks to raise it, the competition will,” a leading banker told BusinessDay.
In September 2020, the CBN issued a circular to all banks ordering that the minimum interest rate on savings deposits be reduced to a minimum of 10% of the monetary policy rate or 1.25%, from the minimum previous 30% of MPR, or 3.75%.
The circular came after the biggest bank in Africa’s biggest economy cut its monetary policy stance to 11.5% in September 2020 from 12.5%.
The letter to all banks signed by Bello Hassan, Director of Banking Supervision on September 1, 2020, reads as follows: “In line with recent market developments, the Bank has reviewed the minimum interest payable on deposits of savings in its guide to bank charges, other financial institutions and non-banks issued in December 2019.
Findings from BusinessDay show that only two banks have revised their interest rates payable on customer deposits.
“Competition may drive up deposit rates, but I don’t see it driving up the current deposit rate in the current situation in Nigeria,” said another top banker.
He noted that the business environment is challenging, resulting in margin compression for all businesses, and therefore banks will maintain lower rates on deposit rates where possible within regulatory approvals.
“The increase in the savings rate will help encourage deposits and increase the amount of funds available for lending to the real sector,” he said.
“The increase in the savings rate was caused by the increase in the monetary policy rate (MPR) from 11.5% to 13%. Recall that the savings rate that banks charge customers is linked to the MPR,” added the banker.
For his part, Muda Yusuf, director general of the Center for Promoting Private Enterprise (CPPE), said that competition can lead to the increase in the deposit rate.
“Banks are always very quick to raise lending rates but very slow to raise savings rates. What makes the difference is the competition.
He noted that there is liquidity in the banking system and this has created an opportunity for banks to offer lower interest rates on deposits.
According to him, with competition from FinTechs and the microfinance space, banks would be forced to adjust their savings rates. “It’s determined by the market, I don’t think it’s regulatory,” he said.
Fidelity Bank raised its deposit rate to 1.3% per annum from 1.15% previously. United Bank for Africa has updated its savings rate offer on its website. The bank offers an interest rate of 2.75% for savings ranging from 50,000 to 90,999 naira and 3.5% for 250 million naira.