What CBN’s MPR hike means for the Nigerian startup ecosystem the central bank of Nigeria just recently hiked the monetary policy rate once again, and what this means for the nation’s startup ecosystem is yet to be known.
CBN’s MPR Hike
During the highly anticipated monetary policy committee (MPC) meeting on Tuesday, February 27, 2024, the Central Bank of Nigeria (CBN) made a notable announcement. CBN Governor, Olayemi Cardoso, revealed a 4% increase in the monetary policy rate.
This decision has ignited extensive discussions and analyses across various social media platforms, indicating its profound implications for Nigerian startups and their consumers.
Understanding the Monetary Policy Rate (MPR)
The monetary policy rate serves as a benchmark interest rate established by the Central Bank of Nigeria (CBN) to regulate the prevailing monetary conditions within the economy. It stands as one of the key tools utilized by the apex bank to address inflationary pressures and uphold economic stability.
The Impact on Nigerian Startups and Customers
An elevated Monetary Policy Rate (MPR) promptly translates into higher borrowing costs for both businesses and individuals. This effect is particularly pronounced for fintech companies, especially those involved in lending operations, as they frequently rely on borrowing from banks to finance their lending activities. Consequently, these increased borrowing costs are then transferred to customers in the form of elevated interest rates.
More Non-Performing Loans for Digital Lenders
The hike in interest rates is likely to result in an increase in loan defaults for digital lenders. With headline inflation soaring at 29.9%, more individuals may struggle to meet their loan obligations as they contend with rising inflationary pressures.
Digital lenders have already been grappling with high Non-Performing Loans (NPLs) in recent years. According to TechCrunch, FairMoney experienced a staggering 138% surge in impaired loans between 2021 and 2022, adversely affecting the fintech’s profitability.
Commercial banks are expected to scale back lending activities in response to the rate hike. However, for fintechs primarily focused on lending, this adjustment may prove to be more challenging.
Digital lenders that lack diversified services may face the necessity of introducing new products or substantially curtailing lending operations. On the other hand, those with a broader range of services may intensify efforts to raise awareness and implement measures to mitigate risks associated with loan defaults.
Less Capital Being Raised
In the previous year, Nigerian startups lagged behind Kenya, South Africa, and Egypt in terms of attracting venture capital investments. Unfortunately, there hasn’t been a notable improvement in this regard this year, and the recent hike in interest rates could potentially worsen this trend.
Lower Revenues
Due to the devaluation of the naira, certain startups were already facing challenges with declining revenues, and this situation could escalate further.
The increase in interest rates would likely compel both individuals and businesses to exercise caution in their spending habits, given the reduced purchasing power. Conversely, many services may experience price hikes, and the prevailing economic circumstances might prompt individuals to discontinue using certain products, leading to decreased revenues for businesses.
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