CBN’s Monetary Policy Committee Plans To Increase Benchmark Rate By 18%


CBN’s Monetary Policy Committee, last week, voted to increase the benchmark interest rate by 50 basis points to 18 per cent. CBN Governor, Godwin Emefiele, disclosed that the slight increase is to mitigate the effect of inflation and manage other economic issues.

Nigeria’s inflation rate rose for the second consecutive month in February to 21.91 per cent from 21.82 per cent in the previous month, according to the latest inflation report. The MPR has been on the rise since April 2022, when it was 11.50 per cent. The rate impacts lending and inflation rates and consequently affects upward movement of prices of goods and services.

It was gathered that a quick impact of the move is the automatic increase in the bank-lending rate, which hitherto had been considered to be very high. Some experts forecast that the interest rate from commercial banks might exceed 30 per cent in coming months.

The real estate sector is under-funded and access to bank funds had always been hampered by bottlenecks in the financial system. Many players believe that it will be foolhardy or futile to expect huge success in a business where you borrow at an astronomic rate.

Developers, in the past, had resorted to options such as rigorous off-plan sales, which never ensured enough cash at hand for business, rather than having to go through the risk of high borrowing with high interest rate. The effect had been high prices for real estate products.

Though, experts say interest rate increases could control inflation to a certain extent, it can exacerbate supply chain issues, drive up prices of building materials, and thereby, make construction projects expensive.

The Chief Executive Officer, Eximia Realty Company Limited, a property development company, Hakeem Ogunniran, told The Guardian that the development would further compound the problems of the industry for developers and those who aspire to buy homes.

He said part of the current challenges is the high cost of funding, stressing that long-term construction finance is not available. He noted that when they are available, their tenures are short.

Ogunniran explained that with an increase in interest rate, the banks would mark up rate again from existing 28 per cent. To him, this will affect construction financing and the entire real estate value chain.

“Even the providers of inputs in the value chain will increase their prices. We are talking about an industry labouring under the yoke of severe challenges including source of funding,” he said.

The former Chief Executive Officer of UPDC Plc said funding for real estate projects requires a holistic approach by government. He urged government to create a special window such as long-term bonds and financial instruments or approach, as well as deploy pension funds.

Disturbed by the low absorption capacity in the mortgage sector, Ogunniran said there was need to pay attention to mortgages as primary mortgage institutions are functioning as commercial banks, thus making it difficult to access mortgages with current high rates of mortgages and tenure.

President, Real Estate Developers Association of Nigeria (REDAN), Dr. Aliyu Wamakko, said the CBN’s new lending rate would push commercial bank interest rates to about 32 per cent.

According to him, the increase would affect members of the association, who specialise in developing affordable housing in the country.

He said: “Without affordable fund, there is no affordable housing. The low-income earners have no room to get a house with high cost of funds. It will reduce the production of housing and increase costs. Only a low interest rate can create affordable housing and massive employment opportunities for Nigerians.”

Wamakko said the incoming government at Federal level must realise that affordable housing needs affordable finance, hence, create the window for such finance. Additionally, he said there should be synergy among agencies in the real estate sector to inculcate mortgage culture.

“There should be a special intervention fund for housing and an enabling environment for the private sector to thrive. The outgoing government was not able to produce the one million housing they promised. The government was not even able to complete the 3, 700 houses and that is why we felt the government had no business in the development of houses.

Basically, all over the world, housing is driven by the private sector. With an enabling environment, the private sector will strive and create opportunities for the government in terms of housing provision.

“There should be a reduction in the cost of interest rate, review of Land Use Act to reflect the present realities. Land acquisition is a herculean task and when governments across all levels budget for housing, it should be channeled through the private sector with single digit interest to produce affordable housing.

The Managing Partner, REFin Homes Limited, Kazeem Owolabi, said the new policy would lead to high cost of building in a sector where operatives have been clamouring for reduction in the cost of construction.

He observed that commercial banks have, following the announcement, started sending letters for review of rate to those who have borrowed.

Owolabi said: “The 18 per cent rate is the internal to the CBN, the external rate will hover around 28 to about 32 per cent to borrow money from the commercial by the time you pay a four per cent fee. Before it was 17.5 per cent and borrowing was at around 28 per cent at commercial banks.

“Developers may no longer have access to finance even if you have access, it will be too high for builders. There is going to be a multiplier effect; building materials will increase, developers will be affected, negotiation fees will increase and the cost per unit of housing will increase.

“When you borrow at 18 per cent, deposit interest will increase. Our housing deficit will increase because there will be fewer operatives and off-takers sales will reduce due to low earning power of the people. What the sector needs now is special funding, specifically designed for developers.”