Interest Rates Are Falling. Is It Time for Nigerian Companies to Refinance Their Debt?

Nigeria’s interest rate environment is beginning to change. The Central Bank of Nigeria reduced the Monetary Policy Rate to 23% in September 2026. At the Treasury bill auction held on 7 October, the 364 day stop rate declined to 15.85%, from 15.89% at the previous auction.

For businesses that borrowed when rates were much higher, this raises an important question. Is it time to renegotiate or replace existing loans?

The answer is not automatically yes.

Lower rates can reduce financing costs and improve cash flow. But a company can make an expensive mistake if it replaces a loan based only on the advertised interest rate.

The real question is whether the new facility creates measurable value after all costs, conditions and risks are considered.

A lower MPR does not guarantee a cheaper business loan

Banks do not price loans from the MPR alone. They also consider their funding cost, liquidity, credit risk, operating expenses and required return.

The CBN retained the cash reserve requirement for deposit money banks at 45% in September. This also affects the amount of deposit funding available for lending.

A company with reliable financial statements, strong cash flow, good repayment history and suitable collateral will usually have more room to negotiate. A company with declining revenue, overdue receivables or weak reporting may not receive cheaper funding even when the policy rate falls.

The starting point should therefore be an actual written offer, not an assumption based on the MPR.

What refinancing means

Refinancing means replacing an existing borrowing arrangement with a new one. A company may do this to reduce interest costs, extend the repayment period, improve cash flow, release collateral or remove restrictive conditions.

Suppose a manufacturer owes ₦500 million at 30% a year and receives an offer at 24%. The six percentage point difference suggests an annual interest saving of ₦30 million if the balance remains unchanged.

But the company may need to pay an early repayment penalty, arrangement fees, legal costs and valuation expenses. The new bank may also demand more collateral or impose stricter covenants.

A lower interest rate is only one part of the decision.

A practical refinancing example

Consider a hypothetical company with ₦500 million outstanding and two years remaining on its loan. Assume the principal remains outstanding for the full two years and is repaid at maturity.

The proposed loan saves ₦60 million of interest over two years. Now include the transaction costs.

The nominal saving is therefore ₦40 million after costs.

The fees are paid immediately, while the interest savings arise over two years. At a hypothetical 24% annual discount rate, the present value of the two ₦30 million annual savings is about ₦43.7 million. After deducting the ₦20 million transaction cost, the net present value is about ₦23.7 million.

On these assumptions, refinancing creates financial value. The company must still review the legal terms, collateral, covenants and execution risks.

When refinancing does not make sense

Now assume the new bank offers 28% instead of 24%. The annual interest saving falls to ₦10 million. Over two years, the total nominal saving is ₦20 million.

If transaction costs remain ₦20 million, the nominal benefit is zero. After discounting the future savings at 24%, the net present value is approximately negative ₦5.4 million.

The company would pay costs now without receiving enough economic benefit later.

There may be other reasons to accept the new facility, such as removing a restrictive covenant or resolving an immediate liquidity problem. Those benefits should be identified and assessed separately.

A cheaper interest rate does not automatically mean a cheaper loan.

Five issues every CFO should examine

1. The full cost of the new facility. Include arrangement fees, commitment fees, legal expenses, valuation charges and every other contractual cost. Compare the effective cost, not only the headline rate.
2. Early repayment penalties. Review the existing agreement and obtain a written settlement figure showing principal, accrued interest, penalties and other amounts due.
3. Loan covenants. A cheaper loan may limit additional borrowing, dividends, acquisitions or expansion. The conditions must support the company’s strategy.
4. Collateral requirements. Additional security may restrict the company’s ability to obtain future working capital or expose directors and shareholders to personal guarantees.
5. Tenor and repayment structure. A longer loan may reduce annual payments but increase total interest. Improving cash flow and reducing borrowing cost are different objectives.

Should the company refinance or renegotiate?

Before moving the loan to another bank, management should ask the current lender to review its pricing.

A bank that understands the company and values its repayment record may prefer to reduce the rate rather than lose a performing customer. This may avoid settlement penalties, collateral transfer costs and some legal expenses.

If the existing bank reduces the rate on a ₦500 million balance from 30% to 25%, the company could save ₦25 million a year. Over two years, that is ₦50 million before any amendment fees.

That may be more attractive than moving to another bank at 24% and paying ₦20 million in refinancing costs.

The objective is not to change banks. The objective is to obtain the most suitable financing arrangement at the lowest sustainable cost.

Refinancing is also a treasury decision

A company may have several facilities with different rates, maturities, collateral and repayment dates. Looking at each loan separately can produce a decision that saves money on one facility but weakens the wider funding position.

Combining several loans may simplify administration but create too much dependence on one bank. Extending repayments may improve short term liquidity but increase long term leverage.

Replacing a naira facility with a lower rate dollar loan introduces foreign exchange risk. A company earning mainly in naira should not take dollar debt without a dependable source of dollar cash flow or suitable protection.

The refinancing review should therefore include the cash forecast, debt maturity profile, funding diversification and overall capital structure.

What management should do now

• Prepare a complete debt register covering balances, rates, maturities, collateral, covenants and early repayment terms.
• Request current pricing from existing lenders and selected alternative banks.
• Compare every offer using the same cash flow model.
• Calculate transaction costs and net present value.
• Test whether the new facility remains affordable if sales weaken, costs rise or collections slow.
• Confirm the accounting implications of transaction costs and any material loan modification under IFRS 9.

Management should base the decision on available contractual terms and realistic assumptions. It should not depend on speculation about where interest rates may move next.

The final decision

Falling rates create an opportunity for businesses that borrowed during a period of unusually high financing costs. But the correct decision is not always the facility with the lowest advertised rate.

Sometimes refinancing is best. Sometimes renegotiating with the existing lender creates more value. Sometimes keeping the current facility is the most sensible option.

Interest rates may be falling, but the discipline required to make a good borrowing decision should not.

All company circumstances, loan amounts, rates, costs and discount rates in the examples are hypothetical. Actual decisions require facility specific cash flow modelling.

Sources

• Central Bank of Nigeria, September 2026 monetary policy decision
• Central Bank of Nigeria, Treasury bill auction data
• IFRS Foundation, IFRS 9 Financial Instruments