On Tuesday, February 27, 2024, the Central Bank of Nigeria (CBN) held a much-anticipated monetary policy committee (MPC) meeting. There, the CBN Governor, Olayemi Cardoso, announced a 4% increase in the monetary policy rate.
The decision has sparked widespread discussion and analysis on social media platforms and carries significant implications for Nigerian startups and their consumers.
Understanding the monetary policy rate (MPR)
The monetary policy rate is a benchmark interest rate set by the CBN to regulate monetary conditions within the economy. It is one of the primary instruments employed by the apex bank to combat inflationary pressures and maintain economic stability.
Impact on Nigerian startups and customers
Increased cost of borrowing
A higher MPR is immediately seen in the cost of borrowing for both businesses and individuals. Fintechs, especially those engaged in lending activities, will see increased costs as they often have to borrow from banks to lend to customers. That cost will be passed on to the customer in the form of higher interest rates.
More non-performing loans (NPLs) for digital lenders
Digital lenders are likely to see more customers default on their loans due to the rate hike. With headline inflation at 29.9%, more people can be expected to default on their loan obligations as they attempt to keep up with inflation.
Already, digital lenders have battled high NPLs in recent years. Per TechCrunch, FairMoney saw impaired loans rise by 138% between 2021 and 2022, impacting the fintech's profitability.
It is expected that commercial banks will reduce lending, but for fintechs whose core business is lending, that may be harder to do.
Digital lenders lacking diversified services may be forced to launch new products or significantly reduce lending activity, while those with additional services may heighten awareness to mitigate risks.
Less capital being raised
Last year, Nigerian startups fell behind Kenya, South Africa, and Egypt in attracting venture capital. That hasn't significantly improved this year, and higher interest rates could further exacerbate this trend.
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Lower revenues
Thanks to the naira devaluation, some startups were already battling dwindling revenues, but that could get worse.
Higher interest rates would force individuals and businesses to exercise restraint in spending as there's generally less money to play with.
On the other hand, many services would see a price increase, and the prevailing economic conditions could mean many would opt to stop using certain products, resulting in lower revenues.
