The Price of Credit Risk in Nigeria: Do Bank Lending Rates Reflect the Opportunity Cost of Treasury Investment? Evidence from Lending–Treasury Spreads, 2006-2026

Abstract: A Nigerian bank that lends to a company gives up the option of buying a Treasury bill instead. The difference between the two rates is the price at which the bank is willing to take on credit risk, illiquidity and the cost of administering a loan. This paper studies that difference using monthly Central Bank of Nigeria data for January 2006 to March 2026 (243 months). The prime lending rate exceeded the Treasury bill rate by an average of 7.29 percentage points (HAC 95% confidence interval 5.73 to 8.85), and the spread was positive in 96 per cent of months. It was not stable. It averaged 8.4 points in 2006–2014 and 9.1 points in 2021–2023, then collapsed to 1.3 points in 2024–2026, turning negative for eight consecutive months after the bill rate jumped in February 2024. Formal break tests confirm three shifts in the mean spread, in December 2008, March 2011 and November 2023. Over the same period the gap between the maximum and prime lending rates, a rough measure of the premium charged to riskier borrowers, tripled from about 5 to 15 points. The spread is highly persistent, with a half-life of about nine months, and neither inflation nor the policy rate explains its movements. Recent volatility in bill yields has a weakly negative association with the spread (p = 0.058). Out of sample, from 2021 to 2026, no model beats a no-change forecast. The paper also shows that two zero entries in the published bill- rate series create a spurious and highly significant volatility effect if they are not corrected. The results suggest that Nigerian banks priced their best borrowers increasingly close to the risk-free rate after 2024, while charging much more to everyone else.

Keywords: credit risk; interest rate spreads; opportunity cost; bank lending; Treasury bills; Nigeria

JEL classification: G21; G12; E43; C22