COMMERCIAL banks’ earnings from interest income rose significantly in the first quarter of the year, with N2.4 trillion in income recorded by major banks, following the continuous upward adjustment of the interest rate by the Central Bank of Nigeria (CBN).

However, this cannot be said of lending to businesses as the cost of funds from deposit money banks is discouraging credit access by micro, small, and medium enterprises (MSME) across the country.

As of the beginning of the year, the maximum lending rates from the banks range from about 25 per cent and rose worrisomely to about 60 per cent as of the end of June, according to data from the CBN website.

For instance, Stanbic IBTC lent to businesses at the highest rate of 37.50 per cent as of January and had raised its interest rate to 50 per cent as of the end of June. Ecobank, which lent to businesses at the highest rate of 28 per cent as of January, had raised it to 60 per cent as of the end of June.

In July, both the Manufacturers Association of Nigeria (MAN) and the Lagos Chamber of Commerce and Industry (LCCI), in separate statements, lamented higher interest rates were negatively impacting businesses and threatening the continued operations of many ventures.

The MAN Director-General, Segun Ajayi-Kadir, said specifically that high interest rates had further constrained the growth of the manufacturing sector, as the purchasing power of consumers, production levels, competitiveness, and sales faced further decline.

In a similar vein, the chief executive officer of the Centre for the Promotion of Private Enterprise (CPPE), Muda Yusuf, told the ICIR that the high cost of funds is increasing lending risks as banks are cautious about businesses meeting risk acceptance criteria and loan repayment obligations.

Yusuf also noted that banks are typically cautious about lending to small businesses due to perceived credit risks and urged efforts to ensure inclusive and stable credit access, particularly to growth sectors like agriculture, manufacturing, real estate, mining, and construction.

“Over 80 per cent of funds are of one year tenure or less, which explains the high level of assets and liability tenure mismatch in the banking system,” he said.

“Access to credit by small businesses remains a major inhibition to economic growth and economic inclusion. Small businesses account for over 50 per cent of GDP but get less than 5 per cent of credit in the banking system. The financing gap in the Nigeria SME space is about $32.2 billion [over N40 trillion], according to International Finance Corporation, IFC estimates. De-risking the credit space for small businesses should be accorded high priority in the new dispensation. This is essential to boost growth, create jobs, and deepen economic inclusion,” Yusuf added.

Financial Statements analysis

The ICIR analysed the half-year financial statements of seven banks and can report that their net interest income grew by 142.56 per cent to N2.4 trillion in 2024, compared to N987.27 billion recorded in the same period of 2023.

The lenders are Zenith Bank, FBN Holdings, Ecobank Transnational Incorporated (ETI), FCMB Group, Sterling Financial Holdings Company, Wema Bank and Stanbic IBTC Holdings.

A net interest income is the difference between interest revenues and interest expenses. Interest revenues represent the bank’s interest payments on their interest-bearing assets, while interest expenses are the cost of servicing interest payments to customers on their deposits.

According to the Corporate Finance Institute, an accounting firm, when interest rates are increasing in the economy, net interest margins become larger. When interest rates are decreasing in the economy, net interest margins become smaller.

The CBN Governor Olayemi Cardoso and his team had resorted to using orthodox methods to tame inflation, raising the benchmark interest rate which determines commercial banks’ lending rates to borrowers.

Between February and July this year, the Monetary Policy Committee of the apex bank had raised rates by 800 basis points. In February, it raised the benchmark interest rate by 400 basis points to 22.75 per cent; in March by 200 basis points to 24.75 per cent; in May by 150 basis points to 26.25 per cent; and in July by 50 basis points to 26.75.

The CBN’s tightening of interest rates has been raising a lot of concerns among industry watchers as the method has yet to curb inflation.

In its June Global Economic Prospects report, the World Bank raised the concern that the CBN might not effectively curb inflation by hiking the benchmark interest rate, lamenting that the apex bank’s method poses a risk to Nigeria’s economic growth.

“Risks to Nigeria’s growth outlook are substantial, including the possibility that the tightening of monetary policy stops short of reining in inflation,” the international fund warned.

Nigeria’s headline inflation had surged from 29.90 per cent in January to 34.2 per cent in June in the period under review despite the apex bank’s continuous rate hike not taming the inflation.

A cursory look at banks’ half-year financial statements shows that ETI, the parent company of Ecobank, posted the highest net interest income of 185.94 per cent to N763.47 billion in the first half of the year, from N267.01 billion in the same period in 2023.

Zenith Bank followed earning N715.07 billion net interest income, from N261.86 billion, representing a 173.07 per cent increase. Stanbic IBTC Holdings saw its interest income rise to N174.30 billion from N72.68 billion representing a 139.80 per cent increase.

The parent company of First Bank of Nigeria Limited, FBN Holdings’ net interest income rose by 118.75 per cent to N514.93 billion from N235.40 billion, and FCMB Group by 46.84 per cent to N106.19 billion from N72.32 billion.

Wema Bank’s net interest income grew by 92.24 per cent to N63.19 billion from N32.87 billion, while Sterling Financial Holdings’ interest income grew by 27.60 per cent to N57.59 billion from N45.13 billion.

Access Holdings, United Bank for Africa (UBA), and a few other quoted banks have yet to release their half-year financial reports, The ICIR can report.

Analysts believe that the impact of the rate hike, naira devaluation, and expansion in earning assets were the factors that contributed to the significant growth of the bank’s net interest income.

The head of Financial Institutions Rating at Agusto&Co, Ayokunle Olubunmi, explained that the significance seen in the earnings resulted because the growth of the interest income far outweighs the interest expenses.

“Don’t forget that some of the assets that brought about the banks’ growth in interest income are in foreign currency and the interest income also will be in foreign currency,” he told The ICIR.

He recalled that as of the year 2023, banks reported an exchange rate of about N800 per dollar and N1,400 as of half year of 2024, stressing the impact of the devaluation on the banks’ interest earnings.

“Some banks also increased allocation, some got more deposits and invested into treasury bills and also the loan book, and as you know, the price lending rate has also gone up,” Olubunmi added.

In a statement, the chief executive officer of Ecobank, Jeremy Awori, noted the bank’s performance despite the macroeconomic challenges faced by the bank in some of its operating markets.