Omolabake Fasogbon
A cut in the Central Bank of Nigeria’s (CBN) monetary policy rate (MPR) usually raises hopes that loans will become cheaper for households and businesses. The expectation is understandable: when banks’ borrowing costs fall, customers may eventually benefit too.
In September, the CBN cut its benchmark rate from 26.5 per cent to 23 per cent amid easing inflation and relative stability in the foreign exchange market. The move aimed to make credit more affordable. For a household planning a major purchase or a business hoping to expand, this may seem like the right time to borrow.
But a rate cut does not mean banks will immediately reduce the interest charged on loans. Lower rates at the CBN do not always reach customers, and industry stakeholders have repeatedly questioned why borrowing costs remain high after monetary policy is eased.
The CBN wants cheaper credit to encourage investment, production and job creation. It can also help reduce government financing costs and improve productivity. For households and business owners, the practical question is: should they borrow now or wait?
Why Loans May Not Get Cheaper
Banks consider more than the CBN’s benchmark rate when deciding what to charge customers. Their rates also reflect funding costs, operating expenses, the risk of non-payment, available cash, regulatory requirements and uncertainty in the economy.
Another factor is the 45 per cent Cash Reserve Ratio (CRR), which requires banks to keep a portion of deposits with the CBN rather than lend it out.
Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, said the high ratio limits the share of deposits available for loans and raises the cost of providing financial services.
Yusuf said lower MPRs failing to reduce borrowing costs had been a longstanding concern and pointed to weaknesses in Nigeria’s financial system, including limited financial access, fragmented credit markets, high lending risks and inadequate systems for assessing borrowers.
Who Benefits First?
Even when rates fall, not everyone benefits equally. Larger companies often have stronger financial records, better collateral, lower perceived risk and greater bargaining power. Yusuf said they are better placed to negotiate cheaper loans or refinance existing debts.
Small and medium-sized businesses, despite their importance to the economy, face a tougher challenge. Many have limited assets to offer as security, fewer financing options and less power to negotiate with lenders. As a result, their borrowing costs may fall more slowly and by less.
What Businesses Should Do Now
While waiting for lower rates to reach borrowers, businesses can review their finances and borrowing plans. Finance expert Dr. Ozemoya Pedro, advised owners to assess existing loans and consider whether refinancing or renegotiating could reduce repayments.
He cautioned against taking a loan simply because rates are falling. Businesses should calculate how much they need and compare complete offers from banks, fintech companies and development finance institutions. The advertised interest rate is only part of the cost; fees, repayment periods and other conditions matter too.
Pedro also advised businesses to prepare financial statements, cash-flow records and tax documents before applying. Lenders will assess whether applicants can repay their debts. Any borrowed money, he said, should go towards activities that produce measurable returns. A loan is useful only when it supports real business growth.
Households should apply the same discipline. Before borrowing, work out whether repayments fit income and essential expenses, compare the total cost of offers and avoid taking on debt simply in the hope that rates will fall later.
Existing Loans, Savings and Investments
The rate cut may create opportunities to restructure or refinance debts, but stronger borrowers are likely to have more room to negotiate. Yusuf said customers with floating-rate loans may qualify for lower rates, depending on the benchmark and the terms agreed with lenders.
Fixed-rate loans generally retain their interest rates until maturity unless the borrower and lender agree to renegotiate or refinance.
Savings and investments may also be affected. Lower MPRs can moderate returns on bank deposits and newly issued fixed-income products. Investors may consider spreading their money across assets, including shares and property, according to their goals and willingness to take risks.
Yusuf said the cut signals a move towards less restrictive monetary conditions. This could help businesses plan with greater confidence, encourage investment and give borrowers an opening to renegotiate financing. However, the benefits depend on inflation continuing to ease, exchange-rate stability and confidence in economic policy.
He called for further reforms to ensure lower MPRs translate more quickly into affordable loans. These include gradually reducing the CRR when conditions permit, improving credit information and lending efficiency, expanding financing for small businesses, and maintaining fiscal discipline so government borrowing does not crowd out private-sector credit.
For households and businesses, a CBN rate cut may create an opportunity, but it does not guarantee cheap borrowing for everyone. Compare offers, understand the full repayment cost and borrow only when the money serves a clear purpose and repayments are affordable.