Banking Sector Reforms

Short Essay Series
Published in Business Day Newspaper on July 31 , 2008

Rising Interest Rates and the Banking Sector Reforms
Martin N. Oluba Ph.D., DBA is the President/CEO of ValueFronteira Limited. He is also adjunct Professor of economics at the Swiss Management Center, Switzerland and Vienna; adjunct faculty (mentor) at Northcentral University, Arizona USA. Send him your comments at martin@martinoluba.com or visit his website www.martinoluba.com for his views on other subjects of national concern.

Interest rates on lending which recently shot up to as high as 30% following the now suspended decision of the central bank aimed at harmonizing the financial year end of banks is yet to recede. This market reaction through higher rates is a pointer to the kind of harm that certain forms of market regulation can unleash upon the entire economy when the fundamental cause of a problem is ignored while a cosmetic solution is deliberately pursued. The role which interest rates play in the life of the entrepreneur is obvious. Most importantly, interest rates serve as a guide that directs and imposes limits on the extent of factor-resource utilization in the current period for future want-satisfying value creation. When rates are unduly higher than the market expects it to be it negatively affects entrepreneurial activities and consequently economy-wide output, income and employment. Bank lending rates in Nigeria has been traditionally high on relative terms primarily because of the equally high cost of mobilizing the funds. These funds mobilizations costs are influenced by the costs of epileptic and nonexistent infrastructural conditions as well as government’s inflation-inducing policies. Digging deeper and analyzing the cause-and-effect chain between the regulatory pronouncement of homogenous financial year end and the consequent rise in interest rates, reveal another interesting perspectives which are critical to the approach to overall reform of the banking... [continues]

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