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Financial Literacy

What the CBN’s Monetary Policy Committee does and how it affects you

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Often times, we wonder what the Monetary Policy Committee (MPC) does, who makes up the committee, and how the outcome of its quarterly economic review meetings affect you. We will address these questions in this short article.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is made up of 12 members of which the CBN Governor is the Chairman. The committee’s mandate is to facilitate the attainment of macro economic objectives such as economic growth, price stability (which includes inflation, interest rates and exchange rates) and providing economic policy support to the Government. In fulfilling these objectives, the committee meets quarterly to formulate monetary and credit policy.

Here is how their deliberations affect you and I 

The Monetary Policy Rate (MPR)

MPR is the interest rate at which CBN lends to the commercial banks. The MPR is the benchmark against which other lending rates in the economy are pegged and is usually used as an instrument to moderate inflation in the economy.

An adjustment in this economic parameter by the MPC could either positively or negatively affect an individual through its effect on the prime lending rate (i.e. cost of borrowing). The prime lending rate is the interest rate at which a commercial bank lends to its most credit-worthy borrowers (usually large corporations, because their risk of default is quite low).

Not every customer obtains loans at the prime rate. Most customers are only able to obtain loans at a rate higher than the prime rate mostly because they are more likely to default on a loan. An increase in the Monetary Policy Rate by the MPC will result in an increase in the price (interest rate) you pay for borrowing and vice versa. That is, an increase in MPR results in a rise in the prime lending rate, and other lending rates by commercial banks, to the public.

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The Monetary Policy Rate is currently held at 14%. It was last increased in 2016 from 12% to 14% – a 2% change. This implies that there would also be a 2% increase in prime lending rate in the economy. Your bank most likely responded to this hike by jacking up their lending rate as well. The consequence of this is that the average Nigerian would have had to pay about 2% more to borrow from the bank.

The aim of this policy move is to discourage you from borrowing, so that you would hold less cash to spend or invest in the economy. This will help to reduce the level of inflation in the economy, since inflation is fuelled by high levels of cash in the economy.

The Cash Reserve Ratio (CRR)

This is another key economic parameter that the MPC would likely adjust or hold in their next meeting depending on the various underlining macroeconomic variables.

CRR simply refers to the ratio of customer deposits (i.e. your money in the bank) the bank is expected to hold as cash or keep with the CBN. The CRR is meant to alter the amount of deposits banks can deploy for lending. So basically, the higher the CRR, the less money banks have available to lend to you and I.

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Through this policy lever, the CBN manipulates the flow of cash around the economy. A higher CRR implies banks will be left with less money to lend or to invest, while, on the other hand, a cut in CRR means banks will be left with more money to lend or to invest. Through this, more money can be released into the economy. This policy may spur economic growth if appropriately utilized.

This policy is also meant to control the level of spending in the economy, and by extension, the level of inflation. The last time this was reviewed was last year when it was raised to 22.5% from 20% in a move aimed at tightening liquidity.

Currently, the CRR as set in the last MPR meeting is at 22.5%, meaning that banks must hold in their reserves N225 out of every N1000 deposit.

Liquidity Ratio

Liquidity ratio refers to the amount of highly liquid assets that banks should hold in order to meet their financial obligations to you, their customer.

As a depositor, banks are mandated to give you your withdrawal whenever you show up at their teller desk. This ratio is designed to guarantee that this keeps happening. Liquid assets include cash and near cash assets.

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If the MPC reviews liquidity ratio upward, more fund will be available to you for withdrawal. In other words, this particular parameter ensures that your bank always hold enough cash to pay you on demand.

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Financial Literacy

How to invest for retirement

Planning for retirement means planning to reduce obligation in the future by investing today.

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How not to worry about money in retirement

“If you plan to retire in five years what should you be doing today?” That’s a question I got last week, and talking with the client, a lot came up which I have decided to share.

First off, What is retirement?

Nigeria’s public service has an official retirement age of 60 or thirty-five years of unbroken active working service, but in financial planning, retirement is a financial, not a chronological event. Retirement can occur when your passive income can meet your non-discretionary expenses.

You start to plan for retirement the day you start to earn an income. Your retirement plan will centre on how to generate passive income and reduce expenses. In Financial Planning, Four distinct stages are usually described in a so-called Lifecycle Chart. These are the Accumulation, Consolidation, Spending, and Gifting stages. Chart 1. Financial LifeCycle seeks to segment investing priorities, recommended asset allocation, and risk profile in a chronological timeline as the person gets older. I will take each of these stages and explain how they are linked to your retirement plan.

READ: How to choose the right Pension Fund Administrator (PFA)

Chart: Financial Life Cycle

Early years: Use Your Time and Make Money, (Accumulate)

The first stage is called the Accumulation stage. Imagine a 22-year-old who has just graduated and is a management trainee. He typically has a low credit score and assets and income are also substantially lower. What he has in abundance is time. So it’s important to deploy his time in the best way to make money. Hence in the accumulate stage, the goal is to generate cash flow either from a job, multiple jobs, working longer hours, saving, cutting unnecessary expenses, etc.

The key measure in the accumulation stage is the Savings Rate which is essentially how much of income earned or generated has not been spent. On average, the participants in the accumulation stage have fewer dependents and maintenance needs which should theoretically make it easier to save.

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READ: This thread exposed everything that’s wrong with Nigeria’s VAT

Mid Years Use Your Money To Buy Assets (Consolidation)

In the consolidation stage the focus shifts from saving to investing. At this stage, the income earned and credit scores have improved. This is when the talk of buying a home or starting a business takes concrete shape because, at this stage, those dreams can be funded. Hence capacity to take on debt is improved, and debt is used to invest in assets like a home. Remember debt is simply front-loaded consumption, which means we are taking our future income to invest today, intending to repay with future income generated from today investment.

The key measure in the consolidation stage is the Rate of Return which is essentially how much has been generated from the investments made.

READ: How to choose the right Pension Fund Administrator (PFA)

Spending & Gifting Phase; Use Your Assets To Generate Cash Flow and Time (Spending and Gifting)

Why is it called the spending phase? Because that’s what the individual is doing, spending down accumulated investments. The spending will include buying annuities or perhaps relocating to another city, your dependant’s college needs, etc. At this stage, typically very few are still earning “new” income but are rather spending from the return of prior investments.

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The key measure in the spending stage is the Withdrawal Rate which is essentially how much of investment can be withdrawn as cash annually to ensure we do not outlive our investments.

READ: How interest rates impact your wallet

Retirement is All About Passive Income

Passive income, which is the income we are making from investing from the accumulation and consolidation stage is now sufficient to generate income and reduce expenses to meet our expenses in the spending/gifting stage.

To give an example, assume we took a mortgage to buy a house in the Consolidation Stage, in the Spending stage, we pay no rent, thus we save cash, which reduces our Non-Discretionary Expenses. In essence, retirement is planning to eliminate your future expenses to the point where you need less income when you retire.

What Should You Invest In Before Retirement Or In Retirement?

Our objective is simple, Income. In retirement, we invest solely to make income to meet our spending needs, Risk profile is also very low because there are fewer recovery options if your investments sink.

The retirement portfolio is an income-generating portfolio that will be overweight in fixed income products. First, determine what the risk-free rate is. In Nigeria, we can take the yield on a ten-year FGN bond as a guide, this means we can have a target of 10% as our huddle rate for the long term. Thus I will recommend an 80/20 portfolio with 80% going to Fixed Income consisting of long term bonds, REITs, and other top-grade commercial paper.

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However what happens if we lock in our funds for 10 years at 10% and rates jump to 20%, meaning a loss to our portfolio.  To avoid this risk we can create a bond ladder, where we break down the bulk sum and duration of our total bond investment outlay. Let us assume we have N10m in cash to invest, instead of one single lot investment of N10m, we split into 5 equal investments of N2m and place for 6, 7, 8, 9, and ten-year maturities. This means by the 5th year the first N2m will mature, if rates are higher, reinvest, if rates have fallen then reevaluate.

READ: 10 Side gigs to venture into while working a full-time job

What about Equities

Yes, equities also pay a dividend. In buying equities, we must ensure we are only buying stocks that pay a dividend above our huddle rate of 10% which is the 10-year FGN bond rate. Which Nigerian stock meet that huddle rate?

  • Lasaco
  • Zenith
  • GT bank
  • United cap

In closing, let us summarize. Retirement is not chronological age. The event occurs when our passive income pays our bills. Planning for retirement means planning to reduce obligation in the future by investing today. Investing in retirement is income-based with a huddle.

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Financial Literacy

Steps to take to bag international scholarships

Here are the steps you should take if interested in pursuing international scholarships.

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United Kingdom opens window of job opportunities for international students

Studying abroad gives you exposure among many other things, and that is precisely why many Nigerians have been looking for ways to study abroad. However, not everybody is privileged with the resources to study overseas and this is where the international scholarship option comes in.

If you are interested in studying abroad and don’t have enough funds, you should consider applying for international scholarships. This article lists the steps you can take to bag international scholarships but before delving into that, here are some types of scholarships available to you as an international student:

  • Location-based scholarships
  • Course or program-based scholarships
  • Sports-related scholarships
  • Research-based scholarships
  • University-funded scholarships
  • Organization-funded scholarships
  • Government-funded scholarships

Having discovered the types of international scholarships available to you, here are the steps you should take to bag any of these international scholarships.

Research: Research is vital if you don’t want to miss out on good opportunities or make mistakes during your application. Research scholarship opportunities available in your prospective college or location and be on the lookout for hidden scholarships.

Check your eligibility: Having done thorough research and discovered the available scholarship opportunities, check to see if you are eligible for them. Many international scholarships have their criteria and requirement, so you should confirm that you are the right fit first.

Get the required documents: After confirming your eligibility, you should get the necessary documents. If the scholarship requires you to write an exam, prepare for the exam, write a good statement of purpose and prepare all other documents.

Start your admission process: Some international scholarships require that you start your admission process and probably get the admission before starting your scholarship application.

Contact past scholarship winners: You might want to contact the previous scholarship winners to know what they did right and how you can learn from them.

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Apply for the available scholarships: The last step is to apply to every available scholarship.

The best way to get funds for your undergraduate, postgraduate, or PhD pursuits abroad is by applying for international scholarships. If you do thorough research, you can find fully funded scholarships that won’t require you to pay any amount. One of the essential steps to getting an international scholarship as a Nigerian is staying abreast of current information and this will require you to network with others.

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