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Editors Pick

Who pays for Value Added Tax and Withholding Tax?

Let’s explain this once and for all.

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Nigeria VAT

We have been inundated with messages from some of our readers who are confused about the application of Value Added Tax and Withholding Tax when paying for invoices provided by vendors.

Don’t be hard on yourself if you do not understand; most accountants also find it hard to figure these things out. Tax can be quite confusing, which is why as a small business owner, you should always have a tax consultant by your side.

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To explain better we will use a scenario:

Jideowo Ltd is a supplier of printing materials and stationery that got a contract to supply stationery to MoMoney Ltd for an invoice value of N100,000. Being Vatable items, Jideowo Ltd adds a 5% VAT to the contract sum, bringing the total amount to N105,000. The invoice looks like this:

Jide Owo Invoice

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What withholding Tax to deduct

Upon receiving this invoice, the accounts department of MoMoney will deduct 5% WHT from it and schedule a payment of N100,000 in favor of Jideowo Ltd. The deducted N5,000 is then remitted to the Federal Inland Revenue Service which issues a withholding tax credit note that should be given to authorized representatives of Jideowo Ltd.

VAT to Remit 

Upon receiving the payment of N100,000 and tax credit note of N5,000, Jideowo Ltd will remit a sum of N5,000 to the Federal Inland Revenue as value added tax on the transaction. The FIRS will be shown the WHT credit note of N5,000 which can be used to set-off future company income taxes.

Break-down of payment (who gets what in cash): 

Invoice amount      –   N105,000.00
FIRS (VAT)             –   N5,000.00
FIRS (WHT)            –   N5,000.00
Jideowo  Limited    –   N95,000.00

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Hope we have been able to clarify this issue adequately. If you still need further explanation, hit the comment section and a member of our team will be ready to respond.


This article was first published on Nairametrics on August 26, 2016.

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Patricia

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

67 Comments

67 Comments

  1. Gbemi

    August 25, 2016 at 2:46 pm

    Thanks for your explanation. I have got a question about the withholding tax, why does MoMoney deduct withholding tax and give Jideowo Ltd a WTC note.

    • Nairametrics

      August 25, 2016 at 2:50 pm

      MoMoney does that because the law authorizes them to do so. It is a statutory requirement. If MoMoney does not deduct the tax then they will have to bear the cost and pay it themselves.

  2. Tunde

    August 25, 2016 at 3:26 pm

    Not sure I agree fully with it. My understanding is that where Momoney is a VAT agent, they will pay 95k, after deducting VAT and WHT of 5k each. The WHT credit note to be received by Jideowo will then be for 5k. Where Momoney isn’t a VAT agent, then they will pay Jideowo 100. It is there responsibility of Jideowo to remit the 5 of VAT.

    • lusia

      September 5, 2017 at 6:27 pm

      Hi so what happens to the other 5000 after momoney pays 95000 and receive credit note for 5000 WHT.

  3. Tunde

    August 25, 2016 at 3:29 pm

    Ultimately, it boils down to the tax rate applicable to the transaction carried out

    • Olayemi

      August 25, 2016 at 4:39 pm

      Momoney cannot not remit VAT on behalf of Jideowo as Jideowo retains the right to remit its VAT. organisations remit VAT after netting off allowable input VAT which Momoney would deprive Jideowo of if it remit on Jideowo’s behalf. on WHT this is dependent on the Rate applicable and how the Invoice is structured. in the case above, Jideowo is a limited liability company and would be liable to a 10% WHT deducted by Momoney as explained by Nairametrics.

      • Nairametrics

        August 25, 2016 at 4:48 pm

        Correct @Olayemi.However, if MoMoney was an upstream oil company then they are allowed by law to deduct the VAT and remit.

        • Tunde

          August 25, 2016 at 6:22 pm

          Thanks @nairametrics for the clarification. Companies operating in the oil and gas industry are designated as VAT agents and have an obligation to deduct VAT. I hope it’s clearer now Olayemi

          • Olayemi

            August 26, 2016 at 10:50 am

            thank you Tunde, it is clearer. tax laws can actually be ambiguous sometimes and capable of different interpretations.

        • Nneka

          September 1, 2016 at 2:26 pm

          @olayemi its not a 10% withholding tax flat rate because Jideowo is a Ltd; as WHT rates are in different bands for different types of services or contracts. You can check the tax data card in the link below for further clarification. Cheers

          https://www.pwc.com/ng/en/assets/pdf/2015-tax-data-card-nigeria.pdf

  4. ♠Gbenga Adesoji ♠ (@iamgbenga)

    August 25, 2016 at 5:00 pm

    why is the WHT N10000, is it 10 or 5%?

  5. AKINYEMI

    August 25, 2016 at 7:09 pm

    well, I think otherwise. you are suppose to apply 5% on the amount. which invariably translate to the VAT charge. so what will be the withholding is 5000. which will be deduct by the company, the company then pays 100,000 to the supplier.

  6. Chiko

    December 21, 2016 at 12:33 pm

    Good day, how will Jideowo record these transactions in his account?

  7. Anonymous

    January 10, 2017 at 3:49 pm

    TOP OF THE DAY, DO YOU CHARGE VAT AND WHT ON CASH TRANSACTIONS

  8. ogwuma

    March 30, 2017 at 12:44 pm

    Thanks Nairametrics for the breakdown.

    However, I want to know how Jideowo would post this transactions in light of the following scenerios:
    1. If Momoney is an oil company that is statutorily required to deduct both WHT and VAT and remit on Jideowo’s behalf.

    2.If Momoney is just any other company that deducts just witholding tax and leaves Jideowo to remit its VAT i.e pays Jideowo #100,000 and gives him a WHT credit note of #5000.

    3. If Momoney pays Jideowo the whole #105,000 so he can remit both WHT and VAT himself.

    How do I post this please. I need urgent response. Thanks.

  9. ogwuma

    March 30, 2017 at 1:21 pm

    For both WHT and VAT

  10. ADEYEMI

    April 21, 2017 at 7:18 pm

    I don’t know what to do pls. Am working with a company CNPC as one of there contract staff which at d end of d month they will prepare a voucher that shows analysis of d payment. Under d voucher , there always a column of WHT of about 20,567. But till now , I v not seen my withhold tax credit note till now.. Over 1 year..
    What do I do ?

  11. IKem

    May 25, 2017 at 4:41 pm

    Where are the accountants. No one to answer this Ogwuma question?

    2.If Momoney is just any other company that deducts just witholding tax and leaves Jideowo to remit its VAT i.e pays Jideowo #100,000 and gives him a WHT credit note of #5000.

  12. Biodun Adeyemi

    July 6, 2017 at 12:24 pm

    Is WHT and VAT applicable on the interest expenses and interest income of banks deposits and loans & advances respectively?

  13. Anonymous

    July 13, 2017 at 11:22 am

    Good day, if an invoice states #100,000 for services and #5,000 for 5% vat, is it correct to deduct the 10% WHT on the total #105,000 or on #100,000 which is the actual cost of the service.

    • Anonymous

      September 8, 2017 at 8:47 am

      Please can you answer the question below?

      If an invoice states #100,000 for services and #5,000 for 5% vat, is it correct to deduct the 10% WHT on the total #105,000 or on #100,000 which is the actual cost of the service.

  14. Anonymous

    July 13, 2017 at 11:25 am

    the comment above is with regards to services rendered to an oil company

  15. Tosin

    July 22, 2017 at 7:03 pm

    Good day, pls if a contract is vat exclusive and no vat is added to the contract sum afterward by the construction firm, will the construction fir still go ahead and remit vat on such project on client company behalf?

    • Nairametrics

      July 22, 2017 at 11:44 pm

      Yes, the construction firm will still go ahead to remit VAT. Vat will be charged regardless of whether it is net or gross. When a client tells you contract sum if Vat exclusive, they are only trying to push the VAT liability to you.

  16. Anonymous

    August 14, 2017 at 4:38 pm

    What is the due date of VAT payment

  17. Anonymous

    September 26, 2017 at 10:28 am

    On or before 21st day of the following month.

  18. Patrick

    October 27, 2017 at 12:30 pm

    If an invoice states #100,000 for services and #5,000 for 5% vat, is it correct to deduct the 10% WHT on the total #105,000 or on #100,000 which is the actual cost of the service.

    • Anonymous

      October 27, 2017 at 1:30 pm

      You deduct for the service of N100,000 . WHT is on the service amount not service plus VAT.

  19. Akan

    November 3, 2017 at 12:59 pm

    I think we should keep this simple.
    when booking the invoice:
    1. Dr stationery acct with the total value of the invoice 105,000
    Cr Jideowo Ltd (vendor acct) 95,000
    Cr WHT payable 5,000
    Cr VAT payable 5,000
    2. When payment is made:
    Dr Jideowo Ltd (vendor acct) 95,000
    Dr WHT payable 5,000
    Dr VAT payable 5,000
    Cr Bank acct 105,000
    WHT credit note would be collected from revenue (FIRS) for onward transmission to the vendor (Jideowo Ltd) this will be used to offset their income tax at the end of the period.
    VAT in turn will also be paid to FIRS by Jideowo Ltd.

  20. Ebere Okechukwu

    November 28, 2017 at 11:10 am

    My question goes thus: Jideowo supplied items worth 100,000 and the cost of the goods is 80000 and his profit is 20000. Will the WHT and VAT be on the profit Or on both the cost and profit. If I follow your explanation a time will come if the WHT and VAT is on the total value Jideowo will not make profit because what he’s paying as tax is more than the profit

  21. Bamidele Temitope

    January 17, 2018 at 2:38 pm

    What is the percentage of WHT on courier company and also is the WHT charge only on the invoice amount with out VAT,example if the invoice amount is 100k VAt is 5% of 100k is 5k .so is the WHT charged only on 100k or 105k ?

  22. Anonymous

    January 20, 2018 at 5:35 am

    hello house. kindly help me out. If you offer by a company to render a service of 115,000, pls i want to know if I will the total value of the contract plus the vat of 5% to it. to make it ₦ 120,750.00

  23. Ade

    February 26, 2018 at 1:03 am

    I need a clarification about this. I did some work for firs itself and they have deducted VAT at source and I paid on some other business did with other people .my question is that can I net off the one paid to firs from the ones paid to others and pay the difference as vat payable

    • Nairametrics

      February 26, 2018 at 10:43 pm

      Yes you can.You net the VAT you paid from the VAT you collected and remit the difference to FIRS.

  24. Ade

    February 26, 2018 at 1:19 am

    clarification about this. I did some work for firs itself and they have deducted VAT at source and I paid on some other business did with other people .my question is that can I net off the one paid to firs from the ones collected from others and pay the difference as vat payable or I still pay all complete without referencing to the one firs deducted

  25. Ndubuisi

    March 30, 2018 at 9:54 pm

    Pls I need your help, I want to submit a quotation to a company and part of the requirement is that vat & wht inclusive, how do I go about it. Pls help

    • Nairametrics

      April 5, 2018 at 6:52 pm

      You simply charge then a 5% VAT on your invoice amount. You will also need to send them your Tax Identification Number (TIN) to show you are legally allowed to deduct and remit VAT.

  26. Tokunbo

    April 10, 2018 at 4:13 pm

    Jideowo ltd is a supplier while Momoney is the customer if both company are vatable ie registered with firs then :
    Jideowo ltd will pay 5000 “vat charged” on his invoice to firs while Momoney pays 5000 “wht” not paid on jideowo’s invoice to firs and give wht credit note to Jideowo ltd to settle her same year income tax.

    accounting entries:

    Momoney ltd books:
    Dr Cr

    Printing & staionery account 105k
    wht payable account 5k
    Jideowo ltd (supplier) 100k

    105 105

    Payment:

    Bank 100
    Jideowo ltd 100

  27. Kelvin Smile

    April 17, 2018 at 10:31 pm

    I need clarification here please.

    I have an Invoice detailed as follows;

    Amount = 103,000

    Vat = 5,150

    Is the WHT going to be on 103,000 or 108,150 (103,000+5,150)?

    Please respond urgently.

  28. Oluwafemi A Owolabi

    May 14, 2018 at 11:03 am

    @Nairametrics, I need clarification on this my special case. As an insurance broker, when i receive premium (call it A) directly from clients, i deduct my commission (call it B) first. Then i compute the VAT (call it C) on my commission and deduct further from the balance (call it A minus B). So i remit A minus B minus C to the insurance company.

    When clients pay directly to the insurance company, I expect my commission from the insurance company. They do it this way: they compute my commission and charge WHT on it. Hence I get less than my commission. How do i treat VAT in that case, knowing that WHT has been deducted?

  29. Ablatbosun

    July 19, 2018 at 4:06 pm

    Pls if Jideowo Ltd gets N95,000. What percentage of Invoice bill would it be?

  30. Abdussalam Iysa

    July 29, 2018 at 12:37 am

    Hello, please what does it mean that the WHT credit note can be used to set off future tax. Is it like an insurance for tax?

    Does it mean if they default later, the paid WHT can be used as an offset?

    Thank you.

  31. Favour

    August 6, 2018 at 2:23 pm

    Hi,

    thanks for simplifying this but please permit me to ask the difference between VAT and WHT. Also, why apply WHT and VAT in same invoice. finally, what are Vatable Items and what items do you charge WHT on.

  32. Az

    August 8, 2018 at 10:59 am

    Pls i need a clarification on this. I use a friend company name (vat registered) to supply items to a company,the sub total is 100,000,VAT 5% Making 105,000.The company then pay us 105,000 including vat.
    The issue now is my said he will deduct 5% vat and 5% WHT (#10000) from the #105,000.
    PLEASE IS THIS RIGHT?

    • Nairametrics

      August 8, 2018 at 12:45 pm

      Hello AZ, only oil companies are allowed to deduct both VAT and WHT from your invoice.

  33. BMK

    September 12, 2018 at 6:11 am

    Hello Nairametrics,

    Apologies for reviving this thread again. Please just for the case of clarity for monthly VAT filing. Please clarify:

    Invoice submitted: N105,000(N100,000 + N5,000)
    Payment Received: N95,000
    Assuming 5% VAT (N5,000) and 5% WHT (N5,000) were deducted.

    So for the sake of clarity of monthly VAT filing:

    Do I NOT file my VAT on that transaction for the month and expect a tax credit note of 5% WHT (for the N5,000) which I pay and then apply to my income tax. Should I also expect that the 5% VAT which was also deducted will be paid by the company I supplied to?

    OR

    Do I GO AHEAD and pay/file my 5% monthly VAT as usual and expect a tax 10% credit note from the company I supply to, which I then pay and apply to my income tax.

    Your prompt feedback is highly appreciated. Thank you.

  34. obinna

    September 17, 2018 at 11:11 am

    what is the best way to submit a quotation to a company for supplies so that the acutal gain to be made from the transaction is not lost in the business. assuming i am to supply to a govt agency goods and services worth 100,000. my gain in that deal is just N10,000. after i sent d bill with 5% vat, the total will be 105,000 but the company paid 95,000 thereby reducing my gain downwards. how best is to do such deal to retain my 10,000 gain.

  35. Onyedikachi

    November 6, 2018 at 8:25 am

    Why should I pay tax, when the government is so irresponsible, living large with taxpayers money, while we suffer zero infrastructure? Just tell me why I should?

  36. Martins

    December 3, 2018 at 11:33 am

    Please some one should add me to an accounting group chart. please. my number is 07031279189

  37. Abdul WAHEED Bello

    February 17, 2019 at 7:57 am

    Pls, as an entity who pays her tax to state tax company like Lagos state inland revenue services, are we going to pay withholding tax to firs

  38. Abiodun

    March 7, 2019 at 4:40 pm

    I need a clarification. if the invoice amount is N100,000 NET OF ALL TAXES, how much is VAT and how much is WHT?

  39. Ade

    March 24, 2019 at 10:39 am

    Is it normal to charge VAT and WHT on same invoice. And if what kind of transaction can warrant doing this ?

  40. Sandra

    March 28, 2019 at 11:25 am

    Is WHT applicable to all services enjoyed by a company? E.g Cable subscriptions , electricity bills and other utilities

  41. Olanrewaju kajopelaye-Ola

    April 22, 2019 at 7:00 pm

    Can we have applicable tax law section and subsection supporting computations made as example please?

  42. susan A

    April 30, 2019 at 3:01 pm

    lemme take for instance, my company charges her VAT FROM SERVICE CHARGE generated in an invoice, bcos we believe that the items we supplied has been vatted from the importer so to say.
    Is that ok?

    • Alfred Akuki

      May 2, 2019 at 10:25 am

      Hi Susan, as long as you are selling the product again you to include or charge VAT for it.

  43. Funmi

    July 23, 2019 at 1:32 pm

    My question is on WHT rate, i learnt that if a company has a contract of service or supply with a vendor , the company will deduct 5% wht on the vendor invoice but if it is like just one off supply or services ( which means no contractual agreement between the company and the Vendor) then you deduct 10% WHT on its invoice, how true is this?

  44. Chukwurah Nonso T

    October 30, 2019 at 3:28 pm

    I want to know how Jideowo would post this transactions in light of the following scenerios:
    1. If Momoney is an oil company that is statutorily required to deduct both WHT and VAT and remit on Jideowo’s behalf.

    2.If Momoney is just any other company that deducts just witholding tax and leaves Jideowo to remit its VAT i.e pays Jideowo #100,000 and gives him a WHT credit note of #5000.

    3. If Momoney pays Jideowo the whole #105,000 so he can remit both WHT and VAT himself.

    How do I post this please. I need urgent response. Thanks.

  45. Ayoade Toyin

    November 6, 2019 at 1:50 pm

    Thank you for the clarification.But what of companies that did not vat their invoice,can the paying company still deduct WHT regardless?

  46. Promise

    December 12, 2019 at 4:59 pm

    what if its educational materials that was purchased. how will the calculation be

  47. Richard

    December 21, 2019 at 5:10 am

    Comment:we have a contractor who in his invoice brings a bill of #440,000 without stating vat, but in the course of raising payment voucher, the superior officer will direct that we should build 5% VAT to the #440,000 before deducting the 5%VAT from the new gross. pls I need clarification. Is it the right procedure.

  48. Tunde Olorunfemi

    January 15, 2020 at 5:48 pm

    Since N105,000 was what was invoice to MoMoney and in return MoMoney will deduct 5% WHT from it and schedule a payment of N100,000 in favour of Jideowo Ltd. The deducted N5,000 is then remitted to the Federal Inland Revenue Service.Also, Jideowo Ltd still go ahesd to pay 5% VAT, what will Jideowo Ltd write in the receipt for Momoney when she demand for her receipt?

  49. Idorenyin Ossom

    February 7, 2020 at 9:33 am

    In line with the new policy that effected from 1st February, 2020, how will the invoice be treated and what will be the responsibility of MoMoney to FIRS. please I need quick response. Thanks

  50. Olaomopo

    February 24, 2020 at 10:01 am

    Pls assist with solution to this situation. If a Gas Supplier supplies Gas to a manufacturing company. Upon payment period, should WHT be deducted from the invoice value or not?
    Bearing in mind that, the Gas Supplier is claiming that he operates in the Petroleum Industry, and as such his payment should not be subjected to WHT deduction.

  51. Chuka

    May 29, 2020 at 8:51 am

    Love your explanations, thanks so much and God bless.

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Currencies

DEVALUATION: CBN updates website to official rate of N360/$1

The central bank of Nigeria has devalued its official exchange rate from N307/$1 to N360/$1.

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CBN website states oil price is still $61, Naira under pressure as Nigeria records poor export earnings, 4 key sectors the CBN plans to pump money into

Just as Nairametrics reported, the Central Bank of Nigeria has devalued its official exchange rate from N307/$1 to N360/$1. The apex bank has now reflected this change on its website signaling a confirmation. The bank is yet to issue a press release to this effect.

The CBN has now officially devalued by 15% moving from N307/$1 to N360/$1. Depreciation at the “market-determined” I&E window is 5% having moved from N360/$1 to N380/$1

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Devaluation: Nairametrics reported yesterday that the Central Bank of Nigeria (CBN) sold dollars to banks at N380/$1 in a move signifying a devaluation of the currency. Banks trading at the Investor and Exporter (I&E) window bought dollars at N360/$1 from the CBN on Friday, March 20, 2020. The I&E window is the official market where forex is traded between banks, the CBN, foreign investors, and businesses. The central bank typically buys or sells in the market as part of its intervention program.

The CBN has updated its website with the official exchange rate.

Nairametrics also got hold of a letter from the CBN to banks informing them of the new exchange rate for dollars flowing from the International Money Transfer Operators (IMTOs). According to the CBN, IMTOs will sell to banks at N376/$1 while banks will sell to the CBN at N377/$1. The CBN will sell to BDC’s at N378/$1 while the BDC’s will sell to end-users at “no more than” N380/$1.

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Single Exchange Rate: A report yesterday also suggested that the CBN also planned to move to a single exchange rate policy for determining the price of the dollar. A senior central bank official who does not want to be identified, said, ‘Today we allowed the rate at the importer and exporters (I&E) window to adjust in response to market developments.’

The central bank has now made an apparent u-turn after it had initially that the “market fundamentals do not support naira devaluation at this time” detailing reasons why it did not need to devalue.

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Falling oil price: Oil prices fell to under $20 on Friday before climbing back up to settle at $23 per barrel. Nigeria’s Bonny light trades at $26 while the benchmark Brent crude trades at $29 per barrel. In response to the crash in oil price, Nigeria’s announced a cut to its 2020 budget by N1.5 trillion as it faced the reality of a potential drop in its revenues. Nairametrics also has information that state governments are getting jittery about their ability to sustain salary payments as a reduction in their federal allocation “FAAC” is anticipated.

Patricia
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Career tips

Investment options for salary earners

Investment options for the salary earners
#Investing #Entrepreneurs #Investment #Salary #Wages

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Investment options for salary earners - bank loan

Recently, one of the readers of my articles asked to know what investment options are open to salary earners. A salaried individual is like everyone else except that he or she has a fixed monthly income. This implies that their investments and expenses have to be managed strictly according to their fixed monthly income.

Since salary is assumed to be the only source of income for the salaried, it is advisable that such an individual fortify himself financially before investing so that adverse investment performance will not have untold effect on him and his family. Therefore, if you are a salaried prospective investor, you need to:

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Get life insurance

Most families in Nigeria are single income families so much such that if anything bad happens to the income earner, the family gets shattered, at least financially. Again, given the risks inherent in capital market investments, it is only prudent to have a life insurance as a first step in one’s investment journey. It is very baffling to see many investors very deep into the market, yet they do not have life insurance.

[Read Also: Understanding the risks in bond investing]

Life insurance is and should be a basic part of any financial plan. Life insurance is a protection for loved ones against financial hardship arising from the death of a breadwinner. This is even more important today than ever before with high cost of funeral expenses, college education and medical bills. So, the first investment option for a salaried individual is to get a life insurance.

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Prepare for financial emergencies

Life is full of surprises, emergencies do happen, jobs are lost without notices, and even good investment opportunities emerge sometimes suddenly. There is, therefore, the need for a cash reserve to help weather the financial storms and emergencies when they come calling.

Cash reserves do not only provide for emergencies, they also help to ensure that investments are not liquidated prematurely or at inopportune times to cover unexpected expenses. There are no hard and fast rules on what the exact amount of the required cash reserve should be, but most financial experts and planners will advise that an amount that equals about six months of living expenses be set aside.

So, as a salaried person, your next investment should be to have a cash reserve. A cash reserve should not necessarily be in a savings account or under the mattress; it could be in an interest-bearing money market account, money market mutual funds with low to zero luck-up period or another form of very liquid investment that is readily convertible to cash without loss of value.

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[Read Also: Understanding the risks in bond investing]

Know your risk appetite

As a salaried and fixed income individual, your risk appetite is most likely going to be low as well as your risk tolerance, although your extended family profile could change all that. You need to know or understand your risk tolerance before you engage in any capital market investment.

Your risk tolerance will and should drive the type of investments you go into. Your risk tolerance depends on your psychological makeup, your current insurance coverage, presence or absence of cash reserve, family situation, and your age among others.

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Talking about family situation, it is reasonable to think that a married individual whose children are still in school will be more risk averse than an unmarried person. On the other hand, older people have shorter investment time horizon within which to make up for any losses. the reason for this is because the older you get the less time you have to work to recoup on losses.

In that case the risk tolerance of an older man will be less than those for younger folks. Again, the more cash reserve and insurance coverage you have, the more your propensity to take risk. Now having known your risk tolerance based on the underlying factors, you can then define your investment objectives

[Read Also: Important tips on how to profit in a bearish market]

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Set your Investment objectives/goals

Having met those essentials above, you are now ready for a serious investment plan or program. A good investment plan starts with investment objectives. Investment objectives are the force that determines what you invest in. Investment objectives range from capital preservation, to capital appreciation and constant income generation.

Capital preservation as an investment objective implies that you, the investor, aim at minimising the risk of loss by maintaining the purchasing power of your investment. So, if you are risk averse or you will need money from your investment soon for children’s education or for building a house or you are nearing retirement, this should be your objective.

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Investors whose aims are to see their investment portfolios increase in real terms over a period of time are better suited for capital appreciation as an objective. This is better for investors that are more risk tolerant and those with more potential to recoup on losses along the way.

If you are already retired or nearing retirement, and therefore depend on your retirement plan supplemented by investment income, you need an investment that generates income rather than capital gains. In that case, your investment objective should be current income generation. It is always good to have investment goals stated in terms of risk and returns.

[Read Also: I-Invest generates over N2 billion transaction in less than 6 months]

Decide on asset allocation

Armed with the knowledge of your risk appetite and investment objective, you are now ready to decide on what to invest in, and how much to invest in any asset class. This takes you to asset allocation decisions. Asset allocation involves dividing an investment portfolio among different asset classes based on an investor’s financial requirements, investment objectives and risk tolerance.

A right mix of asset classes in a portfolio provides an investor with the highest probability of meeting his/her investment objectives. Asset allocation is the most important investment decision an investor can make in a portfolio because it demonstrates an investor’s understanding of his or her risk preferences and return expectations.

It is good to strive for a diversified portfolio. Unfortunately, the Nigerian market does not provide a lot of asset classes for optimal diversification, but diversification can be achieved across sectors or industries within the few asset classes in the Nigerian stock market.

Decide on how to invest

There are different ways to invest in the capital market. You can invest directly by making the stock selections by yourself, thanks to the online stock trading platforms that abound the world over. This implies that you have what it takes to conduct the required research and analysis of the companies whose shares or stocks you wish to buy.

[Read Also: How I Would Invest My Mother’s Retirement Funds]

It also implies that you have what it takes to know when to sell or add to existing positions. Another method is to have someone “do the heavy lifting” for you. In this case, that someone, often times called fund manager or portfolio manager, does the research and analysis and selects shares that suit your investment preferences, investment objectives, risk tolerance and appetite as well as your investment time horizon.

This route is most suitable for investors that lack the knowledge and time for the required research and analysis. If you decide to go this route, mutual funds are the best bet for you.

Patricia
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Atiku kicks as Buhari spends $3.7 billion in foreign debt service since 2015

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Budget: FG completes just 31.7% of constituency projects, Nigerians react to President Buhari's signing of Finance Bill 

The Buhari led government has spent about $3.7 billion in foreign debt service since 2015, one of the highest from any democratically elected government. The highest single-year foreign debt service was in 2006 at $1.79 billion.

About 68% of Nigeria’s foreign-denominated debt servicing is in commercial Eurobonds issues over the last two years. The loans range between 5.1% and 9.2% per annum. Nigeria’s external debt stock stood at $27 billion in June 2019.

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Rising debt service: The Buhari administration has so far spent about $1.1 billion in foreign debt service this year. In 2018, the government spent about $1.4 billion in debt service, more than 3 times the $444 million it spent servicing foreign debts in 2017. The rising cost of debt service is a direct attribute of the government’s reliance on foreign loans as a means of funding government expenditure.

Debt service since 2003. Source: CBN. Nairametrics Research (C)

Foreign Loans: Nigeria’s fallen revenue following the crash in oil price has allowed President Buhari to rely mainly on foreign loans to fund government expenditure. As of June 2015, Nigeria’s foreign loans were about $10.5 billion mostly made up of multilateral and bilateral loans.

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However, by June 2019, total foreign-denominated loans were $27 billion with $10.8 billion made up of Eurobonds. Commercial loans which include Eurobonds and Diaspora bonds make now make up about 42% of total foreign borrowings.

[READ ALSO: Babatunde Fowler attributes FIRS success to technological innovation (Opens in a new browser tab)]

Critics of the government have complained about the government penchant for debts believing that it could put the future of younger Nigerians in jeopardy. Supporters of the government, however, believe the borrowing was necessary to invest in critical sectors of the economy particularly infrastructure.

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Recently, Director-General of MAN, Segun Ajayi-Kadir expressed worry about Nigeria’s rising debt.

“….the rising debt profile of Nigeria continues to be a cause for concern, especially the capacity of government to effectively service it and, at the same time, meet the bursting needs and aspiration of the citizenry going forward.” 

“Already, our budget projections for 2020 anticipates a debt service sum of 2.45trillion, an amount higher than the 2.14 trillion earmarked for capital expenditure. 

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“And even though our debt-to-Gross Domestic Product (GDP) ratio, which currently stands at 28 percent, is still below the average in Africa, our revenue-to-GDP ratio remains low.”

The Finance Minister Zainab Ahmed however, believes the current debt profile is sustainable, comparing it to our GDP.

“Currently, Nigeria’s debt is at N25 trillion; that is about $83 billion. And at $83 billion, we are just at 18.99%…so 19% debt to GDP. I hear people say Nigeria has a debt problem. We don’t have a debt problem. What we have is a revenue challenge and the whole of this government is currently working on how to enhance our revenues, to ensure that we meet our obligation to service government as well as to service debt.”

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[READ ALSO: Babatunde Fowler attributes FIRS success to technological innovation (Opens in a new browser tab)]

Former Vice President and defeated PDP Presidential aspirant, Atiku Abubakar during the week piled criticism on the government’s borrowing.

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“I have said it time and again. The business of government is too serious to be left in the hands of politicians. We must all ask questions because if they throw away the future, it is not going to be their future they are throwing away, it will be all our futures.

“The fact that Nigeria currently budgets more money for debt servicing (N2.7 trillion), than we do on capital expenditure (N2.4 trillion) is already an indicator that we have borrowed more money than we can afford to borrow. And the thing is that debt servicing is not debt repayment. Debt servicing just means that we are paying the barest minimum allowable by our creditors.

What this means: Nigeria’s rising foreign debt profile should be a worry to investors and businesses and must be watched closely. The country’s ability to repay these loans will continue to be harder as it increases especially now that it is costing about 9%. The immediate risk for investors is the exchange rate which could be the first to suffer should the government struggle to repay its loans.

Patricia
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