The Nigeria Interbank Offered Rate (NIBOR) may slump by as much as 13% this month following the decision yesterday, by the Central Bank of Nigeria (CBN), to guarantee loans between lenders, according to Standard Bank Group Ltd.

The Nigerian Interbank Offered Rate (NIBOR) will fall as government guarantees eliminate the risk of lending, forcing the rate “towards a convergence” with the 8% rate at which commercial banks borrow from the CBN, said Michael Hugman, a London-based strategist at Standard Bank. Nigeria’s three-month NIBOR was at 21.38% by 3:30 p.m. in the capital Lagos.

Central Bank of Nigeria (CBN) Governor Lamido Sanusi said yesterday that policy makers “would provide a temporary guarantee from July 8 to March 31, 2010,” to reduce counterparty credit risk and improve the efficiency of interbank lending, according to a statement on the CBN’s web site. “The guarantees offered by the central bank mean there is essentially no credit risk to the commercial banks, which will cause an arbitrage effect to drive down the interbank rate, until it converges with the central bank rate,” Hugman said in a telephone interview. “We would expect that to take place by the end of this month.”

Policy makers in Nigeria, Africa’s most populous nation, are trying to ease the effects of a credit squeeze that sent the cost of borrowing between banks to as high as 25.7% on March 13. Commercial banks demanded higher rates after investors who borrowed money to buy stocks began incurring losses in an equity market slump that sent the Nigerian Stock Exchange All Share Index down 37% in the first quarter.

The NIBOR also climbed as a global financial crisis and a drop in oil prices spurred investors to withdraw money from Nigeria, causing a shortage of cash. The price of oil, which accounts for 90% of Nigeria’s export revenue, has plunged more than 57 percent since reaching a record high of $147.27 a barrel in July last year.

This development comes on the heels of the recent liberalization of Nigeria’s foreign exchange (Forex) market.

Visit the website of the Central Bank of Nigeria (CBN)
Visit Standard Bank’s website

Source(s)
Bloomberg News