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Home Exclusives

With nowhere to invest, Nigerians keep N36 trillion in banks and low yielding assets

Nairametrics by Nairametrics
September 1, 2020
in Exclusives, Securities, Spotlight
With nowhere to invest, Nigerians keep N36 trillion in banks and low yielding assets, Naira hits N570 to $1 at forwards market, pressure on the naira climbs up  
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Nigeria’s low-interest-rate environment for savings and investments is eroding trillions of Naira in value for Nigerians who keep money in the banking system.  The total money supply in the country as of July 2020 was N36.8 trillion up by over N2 trillion from December last year and the highest on record.

The Nigerian financial sector has been experiencing a low-interest-rate environment since the CBN blocked the sale of its Open Market Operations (OMO) bills to local investors (except banks) last October. The singular action has driven savings deposit rates, fixed deposit rates, and other risk-free rates such as treasury bills to under 6% per annum. This is despite a rising inflation rate that rose to 12.82% the highest in 27 months.

Wale Okunrinboye, the Head of Research Sigma Pensions explained why money supply has been on an increase. “On what has driven the expansion. It has been partly driven by credit growth given the LDR policy but more strongly by an expansion in net foreign assets,” he said.

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Since the central bank reduced access to the purchase of its securities, investment in CBN related bills has reduced to N3.4 trillion as of July 2020 from N8 trillion at the end of December 2020. The outflow of money from CBN bills created a huge liquidity supply that found its way back into the banking sector.

The CBN has practiced heterodox monetary policies as it seeks to manage exchange rate stability while attracting foreign exchange investments into the country. To achieve exchange rate stability, it offered high-interest rates to buyers of its OMO bills. However, the cost of servicing these bills and its attendant effects on the economy meant it had to stop in November. OMO bills rate has now fallen to single digits since this year for its short dated bills.

READ: BIG TROUBLE: CBN’s N650 billion ‘crisis’ explained

CRR Pressure

It appears that the central bank may have envisaged that the possible influx of cash into the financial system could trigger a new round of foreign exchange speculation. Banks have in the past been accused of diverting excess cash flow emanating from excess deposits into forex roundtripping rather than lend to the private sector. This risk has resulted in over N2 trillion of banking sector deposits held by the central bank as reserves.  Mr. Okunrinboye explains again.

“On FX demand, the buildup in liquidity could be a problem but the pickup in Bank reserves suggests that CBN’s debits have worked to remove the extra liquidity entirely.”

READ: ‘Shashe Banking’ cost CBN N1.3 trillion in interest expense in 2017

Too much cash, low yields, nowhere to invest

With money supply at all-time highs, interest rates on 3 months treasury bills is a paltry 1.2% compared to about 11% last year. With the inflation rate at 12.8%, investors in Nigeria’s treasury bills have a whopping -11% in negative real return.

Apart from government securities and commercial bonds, the only investment outlet available to invest is in the stock market. But with the possibility of another round of exchange rate devaluation lurking, investors are left to choose between investing in a capital market that has lost trillions in market value or keeping the money in banks at the risk of being eroded by inflation, or look elsewhere even if it means investing abroad.  It appears many have chosen the latter.

READ: Why Emefiele’s interest rate policy is ‘great’

A diaspora investor Charles Bivins, who spoke to Nairametrics lamented about his disappointment with investing in the Nigerian equities market.

“I will not also support anyone to invest in Nigeria’s low-interest-rate as things are now. I was a strong believer in the Nigerian economy and I have invested a lot of funds in the equity market. If I had deployed the capital I invested in the markets in Canada where I reside, I would probably have made like 20 times my money in a 10-year frame. All things being equal, investors should be prepared to take some risk and invest in a low-interest environment, but nothing is stable in Nigeria,” he said.

READ: FG expected to spend a record N12.65 trillion for 2021 budget

Another Hedge Fund Manager who preferred that we do not mention his name vowed he will not invest in Nigeria considering the low-interest environment.

“I cannot invest in Naira right now. Not just possible. It is against any fund manager’s fiduciary responsibility to invest in either equity or fixed income instruments at this time when you are almost certain that you will lose money once you enter,” he concedes.

Unfortunately, a lot of Nigerians have no choice but to retain their funds in Nigeria’s low yielding financial system. Institutional investors like pension funds with over N11 trillion in pension fund assets out of which N1 trillion is in treasury bills and another N1.35 trillion in bank placements. Yields on these funds are by estimates negative after adjusting to inflation.


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Tags: Business NewsCash Reserve RequirementCentral Bank of NigeriaFeaturedNigeria News
Nairametrics

Nairametrics

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.

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