High-interest rate spreads and the Nigerian economy

Mustafa Chike-Obi & Adetilewa Adebajo

Mustafa Chike-Obi is the chairman of the Board of Directors, Bank Directors Association of Nigeria. Adetilewa Adebajo, an investment banker and economist, is the CEO of The CFG Advisory, an independent financial advisory services firm 

The interest rate spread — the difference between the rates charged on loans and those paid on deposits — has been a growing concern since the liberalisation of Nigeria’s banking sector. The unusually wide spread compared to regional and global counterparts indicates significant inefficiencies and distortions within the Nigerian banking system and the broader economy.

Stringent monetary policies and a tight regulatory environment further exacerbate these spreads, which have surged from an average of six percent to a record high of 19 percent between 2023 and 2025. High interest rate spreads have profound implications for Nigeria’s economy and key economic indicators. Such spreads often signal structural inefficiencies, heightened risks, or restrictive monetary conditions, all of which can stifle economic growth. Conversely, lower spreads suggest a competitive financial system conducive to growth and stability. This article explores the causes, impacts, potential remedies, and strategies to reduce interest rate spreads.

Causes of high-interest rate spreads in Nigerian banks

1. Regulatory requirements, charges, and taxes 

The Central Bank of Nigeria’s (CBN) stringent regulations, especially the high Cash Reserve Ratio (CRR) of 50 percent and liquidity ratios, reduce the funds available for lending. Additional costs from AMCON levies, NDIC premiums, and impending windfall taxes further push banks to charge higher interest rates on loans to offset these costs.

1. Monetary policy stance 

The CBN’s tight monetary policy, characterised by high benchmark rates, directly influences lending rates. Higher Monetary Policy Rates (MPR) aimed at controlling inflation lead to increased lending rates and, consequently, wider spreads.

1. Liquidity and funding 

Limited access to affordable funding impacts the interest rate spread. When banks face funding challenges, they may raise loan interest rates to maintain profitability.

1. High credit risk 

The prevalence of non-performing loans (NPLs) forces banks to increase rates to mitigate default risks. Additionally, perceived higher lending risks in Nigeria contribute to a wider interest rate spread.

Impact of high-interest rate spreads on the economy

1. Reduced investment 

High spreads discourage borrowing for productive investments, which stifles economic growth.

• Limited access to credit 

Small and medium enterprises (SMEs) and individuals struggle to find affordable credit, hindering their ability to invest, expand, and create jobs.

• Higher cost of borrowing

Increased borrowing costs elevate operational expenses, diminishing business profitability and competitiveness, and leading to reduced demand for loans.

• Slower economic growth 

Constrained credit markets limit business expansion, adversely affecting GDP growth.

• Inequality and poverty 

Limited access to credit exacerbates income inequality and poverty, particularly in rural areas and among low-income groups.

• Low savings rate 

High loan interest rates and low deposit rates can deter savings, negatively impacting the overall savings rate in the economy.

Key economic indicators affected

• Gross domestic product (GDP): Higher interest rate spreads correlate with suppressed growth rates; our research indicates a strong inverse relationship between spreads and GDP growth.
• Unemployment: Restricted financing limits business expansion and job creation.
• Financial inclusion: High spreads make financial services less affordable for the general population.

Lowering high-interest rate spreads

To address high interest rate spreads, a combination of regulatory, structural, and market-based approaches can be employed:

1. Lowering cash reserve requirements: Reducing statutory reserve ratios can increase available lending funds.
2. Monetary policy reforms: Adjusting the monetary policy framework to achieve lower benchmark interest rates in a non-inflationary context.
3. Fiscal policy reform: Reducing government deficits and borrowing levels, which can lead to inflation and prompt monetary authorities to raise rates.

Advantages of a low interest rate spread regime

• Lower credit risk: Effective risk management and a stable macroeconomic environment reduce borrowing costs.
• Operational efficiency: Technological advancements lower operational expenses.
• Competitive banking sector: A competitive market compels banks to narrow margins.
• Supportive monetary policy: Lower reserve requirements and favourable policy rates can cut borrowing costs.
• Increased borrowing and investment: More affordable loans encourage borrowing and investments.
• Higher economic growth: Enhanced credit availability fosters business expansion and innovation.
• Greater financial inclusion: More individuals gain access to affordable credit products.

Summary and conclusions

The high interest rate spread in Nigeria significantly impacts GDP growth rates. A wide spread results from high lending rates relative to low deposit rates, making borrowing more expensive for individuals and businesses. This situation can lead to reduced investment, consumption, and savings, further exacerbating economic challenges.

Research shows that high interest rate spreads negatively affect Nigeria’s output gap, contributing to decreased manufacturing output and hindering productivity. Resolving this issue requires a multifaceted approach, including measures from the Central Bank of Nigeria to narrow spreads through policy adjustments and efficiency improvements in the banking system.

Specific recommendations include releasing 20-25% of CRR funds for lending to critical sectors at capped interest rates, rationalising statutory costs that inflate spreads, and ensuring effective coordination among fiscal, monetary, trade, and industrial policies.

By addressing the structural and regulatory inefficiencies driving high interest rate spreads, Nigeria can enhance its credit market, promote economic growth, and improve financial inclusion. With a coordinated policy implementation approach, both monetary and fiscal authorities can reduce the interest rate spread and foster sustainable economic growth.

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