Bank customers are set to start earning more interest on their savings following a directive from the Central Bank of Nigeria to all depository banks to raise the interest rate on deposits from 10 to 30 percent.
Daily Trust reports that the CBN recently ordered banks to pay savings deposit accounts an interest rate of at least 4.2%; compared to the 1.4% previously obtained.
In a circular dated August 15, 2022 titled “Revision of the Interest Rate on Savings Deposits”, signed by Haruna B. Mustafa, Director of Banking Supervision, the apex bank explained that the increase in the interest rate on savings, which is effective from August 1, was made in light of the return to full normalcy and after taking into account current macroeconomic conditions. The circular reads in part as follows: “It should be recalled that as part of efforts to mitigate the impact of the COVID-19 pandemic, the Central Bank of Nigeria has reduced the minimum interest rates payable on savings deposits in local currency from 30% to 10% of the monetary policy rate (MPR).This was intended to stimulate the growth of
economy as a whole following the economic downturn caused by the pandemic.
The CBN added that “Following the return to full normalcy and given the current macroeconomic conditions, it has become necessary to make an upward adjustment to the interest rate payable on savings deposits in local currency.
“As a result, from 1 August 2022, the minimum negotiable interest rate on savings deposits in local currency will be 30% of the MPR. This supersedes our letter dated BSD/DIR/GEN/LAB/13/052 on the subject. September 1, 2020.”
The directive follows the CBN’s recent hike in monetary policy rates by 100 basis points, from 13% to 14%.
What is the monetary policy rate?
The monetary policy rate (MPR) is the rate at which the CBN lends money to banks. It is a reference rate for loans in the financial services sector. Savings deposit rates are the default rates that banks pay customers to keep their money in banks.
The MPR is currently benchmarked at 14% by the CBN and 30% of this amount is 4.2%, which is the interest rate on deposits currently administered by the CBN.
The MPR is the base interest rate of an economy. It serves as a benchmark for lending in the financial services industry.
What is the savings deposit rate?
The savings deposit rate is the interest rate that customers get back for keeping their money with banks. It is generally expected that an increase in the interest rate on a savings deposit will increase savings and serve as a form of contraction
According to data obtained from the Nigeria Inter-Bank Settlement System Plc (NIBSS), Nigeria has approximately 191.4 million bank accounts at the end of December 2021.
A breakdown of total bank accounts showed that there are 120.4 million savings accounts, 49.8 million checking accounts and 8.9 million business accounts. These figures show that about 70% of bank customers hold savings accounts in the country.
Involvement on customer deposit
Checks carried out by Daily Trust show that with the new directive, bank depositors will see their savings increase while the interest rate on their savings account is expected to increase by more than 200%.
Moreover, with the new development, many Nigerian depositors might be encouraged to ignore various fintech companies that reward savings with higher interest than banks.
Similarly, the interest rate on savings accounts is seen as a deliberate move by the CBN to reduce the money supply in the economy amid rising inflation rate and also increase spending habits. savings of Nigerians.
On the other hand, low interest rates often encourage investors and businesses to invest their money in the economy rather than storing it in bank vaults to gain value without having to spend it.
However, if the increase in interest rates succeeds in curbing inflation as expected by the central bank, it will also lead to a decline in the rising cost of living in Nigeria, which is currently struggling with an overall rate of inflation of 19.64%.
The latest deposit and lending rates in the banking sector published on the CBN website showed eight banks paying a savings interest rate of 1.40%. The banks are Access Bank,
Citibank, Ecobank, Globus, Polaris, Stanbic IBTC, Sterling Bank and Zenith Bank. Others offered between 0.88% and 4.20%. Banks affected by the directive The Daily Trust’s checks of the CBN’s website show that there are currently 24 commercial banks operating in Nigeria.
The directive means that customers of any of these banks will now benefit from the CBN directive. The banks are Access, Citibank, Ecobank, Fidelity, First Bank, First City Monument Bank, Globus Bank, Guarantee Trust Bank and Heritage Bank. The others are Keystone Bank, Parallex Bank, Polaris Bank, Premium Trust Bank, Providus, Stanbic IBTC Bank, Standard Chartered Bank of Nigeria and Sterling Bank.
Also on the SunTrust list are Titan Trust, Union, United Bank for Africa, Unity Bank, Wema Bank and Zenith Bank. As such, it is expected that with the CBN directive which came into effect on August 1, bank customers will start to see more benefits for saving their money in commercial banks.
This Explainer is produced in partnership with the Center for Democracy and Development.