The Central Bank of Nigeria has reduced its benchmark interest rate from 26.5% to 23%, a 3.5 percentage point cut. This move is expected to make credit cheaper for businesses. However, the impact of the rate cut may be limited by late customer payments. Governor Olayemi Cardoso described the decision as a recalibration of monetary policy rather than a shift away from the bank's restrictive stance.
The reduction in the benchmark rate does not guarantee an equivalent reduction in commercial lending rates. Even if lenders pass on the full 3.5 percentage point reduction, businesses may still face high financing costs due to late customer payments. A supplier may pay for materials, transport, and labor before receiving payment from customers, and interest can continue accumulating while the customer uses the goods and the supplier waits for payment.
Late customer payments can significantly increase the cost of borrowing for businesses. For example, a supplier borrowing ₦10 million at 30% annual simple interest, with the entire balance outstanding until payment arrives, would pay approximately ₦739,726 in interest over 90 days. If the lender reduces its rate to 26.5%, matching the size of the CBN adjustment, the bill would fall to ₦653,425, saving about ₦86,301. However, if the customer pays after 120 days, interest at the lower rate would reach ₦871,233.
The supplier would spend approximately ₦131,507 more than under the original rate with payment after 90 days. This illustrates the impact of late customer payments on the cost of borrowing. Businesses reviewing their financing after the CBN decision should examine when customer payment becomes due. A 60-day term counted from invoice approval can mean a much longer wait from the date materials were purchased or work began.
Deposits, milestone payments, and prices that account for extended credit can reduce exposure to late customer payments. Discounts offered for early payment also need to cost less than the financing they save. Earlier collection only reduces interest where the borrowing agreement allows it. Fixed charges, minimum interest periods, and early-repayment fees can affect the calculation.
The CBN's decision may eventually make borrowing cheaper, but the customer still helps determine how many days that naira must remain borrowed. Businesses need to examine borrowing costs alongside customer payment terms to maximize the benefits of the rate cut. The British Business Bank identifies inventory funding and late payments as pressures on working capital.
The impact of the CBN's rate cut will depend on how businesses manage their financing and customer payment terms. While the rate cut offers opportunities for cheaper credit, late customer payments can quickly erode these savings. Businesses must carefully review their financing arrangements and payment terms to ensure they maximize the benefits of the rate cut.
Key points
- The CBN's rate cut may not lead to immediate savings for businesses due to late customer payments.
- Late customer payments can significantly increase the cost of borrowing for businesses.
- Businesses should examine borrowing costs alongside customer payment terms to maximize the benefits of the rate cut.
