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.
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.
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 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.
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.
Shifting consumer habits demand fresh focus to fight fraud
PFD identified 90 merchant websites compromised by multiple variants of ecommerce skimmers.
Nearly every part of daily life has changed as the world continues to fight back against COVID-19. Most observers agree that the increased focus on digital commerce by consumers and merchants will likely remain even after a vaccine is found and the economy rebounds.
As the pandemic and its economic impact extend into 2021 and beyond, these new habits will likely crystalize. It is important for merchants and financial institutions to adapt now to support consumer behavior through safe, reliable digital commerce.
A shift to online channels by consumers and fraudsters
Globally, consumers are shopping more online. Just look at the numbers.
- In Nigeria, more consumers turned to online shopping for the first time with 42% of shoppers starting to purchase food via eCommerce platforms.
- In South Africa, in-store physical activity greatly dwindled, with 63% consumers visiting physical grocery stores less often.
- In Kenya, consumers’ preference for digital solutions is fast increasing as customers turned online for shopping. 43% of consumers started purchasing from pharmacies online
- In the U.S., Visa credentials active in spending on eCommerce channels, excluding travel, were over 12% higher in June than in January. Moreover, when you examine the active credentials who tend to be more significantly engaged in eCommerce, the spend per active credential increased by over 25%.
- In the U.K., active eCommerce credentials increased 16% while spend per active credential increased 3%.
Where consumers go, fraudsters follow and Visa’s Payment Fraud Disruption (PFD) team has seen a similar shift in fraudulent activities/fraud attempts from in-store to online.
Between March and April 2020, there was a rise in fraudsters establishing short-term “COVID”-named merchants and using these fraudulent merchants to perform account testing and enumeration. This is where fraudsters use merchants or financial institutions to guess account numbers, expiration dates and CVV2/security codes through automated testing. This activity is often marked by high volumes of low-dollar declines.
Fortunately, fraud prevention capabilities such as Visa Account Attack Intelligence, which prevents account testing, and Visa eCommerce Threat Disruption, which prevents online skimming, are free of charge and are among the many fraud prevention layers and security benefits available to Visa clients.
Visa, financial institutions, and payment providers work hard to keep consumers’ payments safe – using multiple layers of security to prevent fraud, protect data, and help them get their money back if someone uses their card without permission. Yet, fraudsters are counting on consumers to be distracted and let their guard down, so they can trick them into handing over their personal or financial information.
This is why we believe consumer education is key in the fight against fraud and we have been helping consumers understand how to spot fraudulent activity and how to protect their sensitive information, particularly now, when most of our payments have shifted to digital.
Here are three simple steps every consumer can follow to stay safe when shopping online:
- Pay securely online – When paying online, use Visa Checkout that offers an extra layer of protection and always check the URL to ensure it begins with “https://”. The “s” at the end confirms a secure connection.
- Pay securely in-app – Update your passwords with a strong password unique to each account or better yet, switch to fingerprint or facial recognition for account login and/or payments if it’s an option.
- Beware of phishing scams – Be careful of unsolicited and suspicious emails, SMS or phone calls. They may try to steal personal information like your account number, username and password. If in doubt, do not click on any links or download files.
Additionally, we implement a rule-based authentication service called Visa Cardholder Authentication Service (VCAS) that combines risk intelligence and targeted rules strategy to help reduce customer friction as well as provide seamless payment experiences.
The need for contactless payment acceptance in Nigeria
While online commerce has increased, in-store purchases have not gone away. Essential workers still have to go into the office and re-fuel for their commute and some goods simply cannot be purchased online and delivered to consumers. In these situations, embracing contactless card payments can offer peace of mind. Visa data shows that consumers are increasingly embracing contactless across the world, and as Main Streets and High Streets reopen, consumers are asking for more touchless options to pay.
Touchless, or contactless payments, where one can tap to pay with a card or smart phone, enables a safe and secure experience without the need for consumers to touch the checkout terminal and early indications show usage is high among grocery stores and pharmacies around the world. A few other trends include:
- Nearly 50 countries improved tap to pay penetration by more than 5% and over 10 countries increase by 10% or more from fiscal year Q2 to Q3.
- Visa helped more than 55 countries increase the tap to pay limits, reducing the share of transactions that require consumer contact by more than 40% in several of those countries.
- In the U.S., more than 80M contactless Visa payment cards were added in the first 6 months of the calendar year as financial institutions accelerated their issuance schedules.
Despite the increase in penetration and card issuance, the fraud rate for contactless payments is significantly lower than the overall card present fraud rate, which illustrates the security of tapping to pay.
Although there may be some regression back to the norm after the pandemic, it is not a leap to think some habits will remain. The shift to buying online is here to stay. For merchants and financial institutions, adapting to new consumer habits not only means meeting customer preference, but it is also an investment into the future of digital payments. It is time for Nigeria to embrace the convenience and security of tapping to pay in-store.
What policy changes, other challenges hold for MSMEs in 2020 – Chief Economist, PwC
The startup companies are valued at over $1 billion because the uncertainties of doing business in Nigeria are quite high.
It is a given that 2020 has been one of the most trying years for business owners and entrepreneurs. Some businesses have been crushed completely, with some left barely breathing.
The year started with the announcement of the increased VAT rates, moved on to the coronavirus pandemic and its attendant challenges, the global oil crisis and its implications on national revenue, and just after the easing of the lockdown, the recent increase in fuel price. What do all these connote for Micro, Small, and Medium Enterprises that were already groaning under stiff economic policies and trying to survive the hard days? Your guess is as good as mine.
Taxation in the middle of a pandemic
Amid all of these challenges, the government (through its agencies) trying to widen its tax net and improve revenue, with more duties and tax options being imposed on Nigerians. Just recently, as courier and logistics business operators were still trying to grapple with the implications of the increased NIPOST license fees, when NIPOST and FIRS went on a social media war of words over which agency is constitutionally justified to collect the Stamp Duties.
There is also the recent rental tax announced by the government, a move still being protested by unions who have argued that this pandemic period is a time for the government to give out palliatives, not widen its tax net.
What do the multiple changes and challenges in 2020 mean for MSMEs?
In a recent tweet on his handle, Partner & Chief Economist at PwC Nigeria, Andrew Nevin (Ph.D.) noted that the current circumstances will stifle the entire economy and constrain MSMEs from growing, as it is quite difficult to grow in an economy that is not growing.
“… The complexity and cost of governance and the fiscal crisis is leading to a situation where successful companies in the tax net are subject to more and more taxes, which means they cannot grow and some companies in the formal economy will try to move back to the informal economy, further compounding the issue,” Nevin tweeted.
… the complexity and cost of governance, and the fiscal crisis is leading to a situation where successful companies in the tax net are subject to more and more taxes, which means they cannot grow …
— Andrew S. Nevin, PhD (@nevinomics) August 7, 2020
Nevin also noted that even though the SMEs employ over 80% of the country’s workforce, the startups in Nigeria hardly get to the point where they are valued at over $1 billion. And this is because the uncertainties of doing business in Nigeria are quite high. Gokada, for instance, had a thriving business environment and was set to break even when the new policy was introduced banning motorcycles across major routes in Lagos. This, he said, shows the uncertainty of the business environment in Nigeria.
… a very good example is GoKada … they invested heavily in Lagos, and the Governor was supportive .. then for perhaps very good reasons security requires that the business is banned … and the GoKada investment has been lost …
— Andrew S. Nevin, PhD (@nevinomics) August 7, 2020
In addition, attracting global capital to scale a unicorn requires more money than are readily available for risky companies in Nigeria. The challenging business environment and the ‘reputation’ associated with the Nigerian flag makes it very hard to get sufficient external capital.
According to him, SMEs entering the formal sector means higher productivity and monitored payment of taxes. Yet, entry into the formal sector is still a choice most small businesses do not want to embrace due to the economic environment.
“… if the cost and complexity of entering the formal sector is too high, then the SME will elect to stay in the informal sector with all the attendant issues, including that they can be subject to harassment by the authorities,” he said.
He noted that the large SME sector arises partly from unemployment and people rushing into entrepreneurship as a means of livelihood; as well as the difficulties to grow a large and strong business.
“These type of statistics always tell us the sector is huge but it is huge because it is too difficult to grow big companies, so this is not a sign of strength. The best structure for the economy is to have strong large companies that then create room for SMEs to be part of their ecosystem.
“Large companies raise standards (look at quality of Dangote companies for example) and raise productivity and create opportunities for others so large SME sector is sign that business is too difficult because if Nigeria was functioning correctly, we would have 100+ Dangotes in the Economy,” Nevin tweeted.
Explaining the challenges of MSMEs in Nigeria, Chairman and Managing Partner at Ofuani Maidoh & Co, Clement Ofuani, noted that small businesses in Nigeria have more pressing challenges to deal with than the government-imposed fiscal burdens.
Ofuani told Nairametrics in an interview, that the harsh and hostile operating environment makes for a more serious challenge for small businesses.
“Epileptic electricity power supply, inefficient transportation system and insecurity impose more operating costs on MSMEs than the fiscal taxes listed,” he stated.
Ofuani, who served as Senior Special Assistant to President Umaru Musa Yar’Adua on Policy, explained that the Finance Act waives income tax for companies with turnover below N25 million, thus granting fiscal reliefs to most small businesses.
“The stamp duty on rental agreements and other agreements are additional burdens as is the increase of VAT to 7.5% but the below-the-table taxes paid by MSMEs in form of unreceipted ‘taxes’ to the security personnel along the transportation corridors, and to bureaucrats for normal government services are the greatest frustrations that make Nigeria uncompetitive in global commerce and as an investment destination,” Ofuani stated.
Amid all of these formal and informal challenges, it becomes very difficult for the small start-up to grow beyond its startup stage and become a big company.
The on-going pandemic and recent policies have done little or nothing to address these challenges and despite the palliatives, loans, and support schemes being launched by the government at various levels, most of these small businesses will still find their growth stunted by some of these “unreceipted taxes”.
Payback and Return on Investments
To calculate payback, the cash flow or return from the investment needs to be known.
In previous articles, we have explored various methods of fundamental analysis, including cash flow and earning. Two key questions every investor asks are — How much will I make from this investment? How soon can I get returns? These questions are broadly Return on Investment (ROI) questions and there are lots of ways to calculate it, including Breakeven Analysis and Internal Rate of Return. Let us look at their ROI tools in detail starting with Payback
Payback is how long it takes for an investment or business to recoup its initial investment. With Payback, the shorter the number, the better. Look at it this way, if you got an offer to build a railway from Lagos to Ibadan and you will get payback in 5 or 8 years, which would you prefer? 5 of course.
Payback analysis is useful where the investor wants to know if the project is work the time and investment capital it is also easy to calculate. A shorter payback also means the project has a shorter time to be exposed to volatility and risk however this does not mean it eliminates risk, it just determines time frame during which the investment is subject to higher volatility without a full return of invested principal. Payback is like Breakeven calculation, but payback is focused on time while breakeven is focuses on time as a unit.
To calculate payback, the cash flow or return from the investment needs to be known. For instance, A company wants to set up an online platform to receive online orders. It estimates the project will cost N5m in total and will increase sales by N1.5m every year. The company projects that the equipment will be depreciated at 20% meaning it will last 5 years. What is the payback for this project?
To calculate payback, we divide the total cash sum by the cash returns for the project. In this case, 5,000,000/1,500,000 that equals to 3.33. Note the company estimated the project equipment will last 5 years
Payback does not talk about profitability, rate of return or if the company investing will remain as a going concern. The calculations are simply focused on when the initial investment is repaid. From the example above, the N1.5 the earned from new project 1.5m is not profit, its cash received because of the new online ordering system. Payback does not also consider Time Value of money, thus again from our example, the Present Value of N1.5M received is not considered. This Payback is often used as a gateway analysis tool to determine if a project should be considered.
To enhance Payback calculations, many analysts will integrate time value calculation with discount rates to match the future cash flows to today’s cash outlay. This is known as Net Present Value (NPV) which is the present value of the cash flows at a discount rate compared to your initial investment. Thus, NPV compares future cash to today’s cash outlay to determine If project is viable. Eg you discount all future dividends from stock using a discount rate back to today and compare it with a market price to determine if you should buy the stock. If NPV is positive, then the project or investment is good, a negative NPV means the future cash flows are worthless, thus not a good investment. The main problem with NPV in my estimation is the assumption of the discount rate to use. A discount rate that too high or low will skew the results of the NPV and render the output false.
The last ROI calculation I want to review is the Internal Rate of Return (IRR). Technically the IRR is the rate of return that makes all cashflows rates of return equal to zero, in other words, it is the rate of growth investment is expected to generate annually. The more positive the better. IRR integrates the elements of payback and NPV and is also use in comparing different options and picking the option with the highest value.
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Today, all these formulas are available on Excel sheets and financial calculators on our mobile devices you do not have to be a math’s geek to implement ROI, but I remain a useful tool in comparing projects.