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How declining interest rates, others drive a shift in Nigeria’s investment sector

It has been noted that the declining rates of interest have forced savers to turn to mutual funds.

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There is an ongoing paradigm shift in the Nigerian investment space, especially due to the crash in interest rates in the first half of 2020.

This fact was revealed in the presentation of a revolutionary report recently released by Coronation Asset Management, titled, “Shifting the Appetite of Nigerian Investors; From Savings to Mutual funds.”

The report highlighted that Nigerian investors are faced with difficult choices, as interest rates have crashed; therefore the options are either to wait for the rates to rise in the future or accept more risk, in order to increase returns. The report also highlighted that over the last 10 years, it has been remarkably easy to beat inflation by buying FGN Treasury Bills, which averaged 2.57% above inflation between 2010- 2019. However, with the crash in interest rates in the first half of the year, this era has ended abruptly.

Gold rush

In a keynote presentation, the Head of Research at Coronation Asset Management, Guy Czartoryski, stated that the declining rates of interests have forced savers to turn to mutual funds, as a way of managing and protecting their money.

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He also stated that the total assets under management (AUM), over the last four years 2015-2019, more than doubled in inflation-adjusted terms, and were up in nominal terms by over 305%. He further remarked that the compound annual growth rate (CAGR) in total AUM from 2015 to 2019, was 22% in inflation-adjusted terms, and 42% in nominal terms. It would be difficult to find a Nigerian industry that matches this.

At the moment this industry is only about one-tenth the size of the Pension Funds, but it is growing fast.

Breakdown analysis

  • Money Market funds grew, from 2015 to 2019, at a CAGR of 28% in inflation-adjusted terms and 49% in nominal terms, faster than the fund management industry as a whole. They grew by 11% in the first half of this year.
  • Fixed Income funds grew, from 2015 to 2019, at a CAGR of 82% in inflation-adjusted terms, and 111% in nominal terms. Growth has picked up rapidly in the past two years, with growth at 60% during H1 2020, in nominal terms.

Distribution of Mutual Funds

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  • The AUM of the fund management industry stood at N1.3 trillion (US$3.4bn), as at 30 June 2020.
  • The distribution by type is Money Market funds, 61.4%; Fixed Income funds, 16.6%; US dollar bonds funds, 10.4%; Infrastructure fund (one fund), 4.4%; Real Estate funds, 3.2%; Mixed funds (i.e. money market plus fixed income plus equity), 1.9%; Exchange Trade funds, 1.0%; Equity funds, 0.8%; Ethical funds, 0.3%.

Conclusion and the way forward

Guy, in his closing remarks, suggested pragmatic ways by which the mutual funds industry can grow. He opined that the industry needs a new level of risk management. Investment risk is rising as yields fall, and fund managers and investors need to master risk management, and learn the benefits of diversifying their investments across asset classes.

In addition, he called for the need to liberalize information of the industry, especially as it relates to fund performance, “For example, in a developed market such as the UK, it is possible to access the Morningstar website and the Financial Times Fund Comparison website and make easy and effective comparisons across thousands of funds. Nigeria’s regulator, the SEC, is moving the industry in this direction.”

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Chidi Emenike is a graduate of economics, a Young African Leadership Initiative Fellow and an Investment Foundations certificate holder. He worked as a graduate Teaching Assistant in the Federal College of Education Kano and is also a trained National Peer Group Educator on Financial Inclusion

1 Comment

1 Comment

  1. John

    October 9, 2020 at 2:49 pm

    Very serious questions begging for answer.

    1. Why is SEC not as active as CBN as a regulator?
    2. Why is there no cap on CEO of asset management firms tenure?
    3. Why is SEC so lackadaisical about rampant lack of corporate governance in asset mgt industry?

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Debt Securities

Interest rates will remain low until the end of H1 2021 – Meristem Securities

Meristem Securities has argued that interest rates will remain low until, at least, the end of H1 2021.

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Why Emefiele’s interest rate policy is ‘great’

Meristem Securities has asserted that interest rates will remain low until, at least, the end of H1 2021.

This statement was made at the recently held webinar on Global Economy and Outlook, which the company themed: Bracing for a Different Future.

Although the company acknowledged that there is mounting pressure for upward movement in yields from several stakeholders, it appears the company concurs nothing concrete is in sight.

This line of reasoning seems to have influenced their decision to advise investors to move away from Treasury instruments.

What they are saying

Meristem advises that:

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  • “Buy and hold strategy investors seeking to generate above average returns should move away from risk free Treasury instruments and focus on investment grade commercial papers and bonds which satisfy investment objectives.”
  • “Active traders with higher risk appetite are advised to focus on high-yield short duration instruments, which would be re-invested into a higher yield environment should rate reversals occur.”

The advice regarding shunning Treasury instruments appears to be in order, considering that treasury bill rate has been declining, with the latest figure — November 2020 — 0.03% as per the CBN monthly interest rate data.

Further checks from the Debt Management Office website, indicates that the latest figures for Eurobonds and Diaspora bond fall short of the fixed yield at issue for all the different categories of bonds in issue.

What you should know

Latest figures from the CBN’s monthly interest rate indicate that:

  • Treasury bill rate has been on a steady decline for six months, down to 0.03% since the last rise (2.47%) in May 2020.
  • Fixed deposit rates (one, three, six and twelve months) have also been declining – the latest figures for these indicate that in November 2020, one-month deposit rate was 1.92%, 2.9% for three months, 2.84% for six months, and 4.89% for 12 months.
  • Compared with the corresponding period in 2019, the figures indicate that these rates fell by 75%, 66%, 71% and 49% respectively.

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Financial Services

CBN issues framework for QR payments

CBN has issued a framework that would guide Quick response (QR) code payments in Nigeria.

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The Central Bank of Nigeria has issued the framework that would guide Quick Response (QR) Code Payments in Nigeria.

This is a proactive move by the Apex bank towards ensuring the safety and stability of the Nigerian Financial System, as well as promoting the use and adoption of electronic payments and foster innovation in the payments system.

READ: Over 1 million people took loans from banks below 20% interest rate in 1 year- CBN

Quick Response (QR) Codes are matrix barcodes representing information presented as square grids, made up of black squares against a contrasting background that can be scanned by an imaging device, processed and transmitted by appropriate technology.

The codes are used to present, capture and transmit payments information across payments infrastructure and further enable the mobile channel to facilitate payments and present another avenue for promoting electronic payments for micro and small enterprises.

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READ: Binance offers DeFi coders $100,000; DeFi market value hits $8 billion

What you should know

  • Quick Response (QR) codes are two-dimensional bar codes. QR code payments allow merchants to receive payments from customers simply by scanning generated QR codes using a smartphone camera. The QR code payments carry the purchase transaction information to the mobile device of the buyer/customer.
  • Making payments via QR codes is very secure. It is because the QR code is nothing but just a tool that is used to exchange information. Any data which is transferred via QR codes is encrypted, thus making the payment secure.
  • The Participants in QR Code Payment in Nigeria include Merchants, Customers, Issuers (Banks, MMOs and Other Financial Institutions), Acquirers (Banks, MMOs and Other Financial Institutions) and Payments Service Providers.
  • QR payments are increasingly becoming a popular means of payments in Nigeria, and some industry players would see the framework as a perfect way of regulating the sector.
  • QR codes are capable of storing lots of data. But no matter how much they contain, when scanned, the QR code should allow the user to access information instantly. It can be used for payments, sharing contacts and Wi-Fi passwords and lots more.
  • The popular and common argument is that since POS machines are expensive, cheaper options such as QR scanners should be pushed forward to local traders.

READ: Telecoms, FSI to hugely boost Nigerian Economy in 2021 – CWG’s Business Director

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Financial Services

CBN unveils framework for regulatory sandbox operations

CBN has issued a regulatory Sandbox framework towards engaging with the operators in the Fintech space.

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diaspora remittances, Total credit to the economy rose to N19.54trillion – CBN Governor, CRR debits, P-AADS, #EndSARS: CBN says funds in frozen accounts may be linked to terrorist activities, Covid-19: Court closures impacted revenue generation for courts - Emefiele, P&ID dispute: UK Court orders $200 million guarantee to FG, Leaked letter by Poultry Farmers Association triggered CBN emergency approval to import maize, nImplications of CBN's latest devaluation and FX unification, current account deficit, IMF, COVID-19, CBN OMO ban could give stocks a much-needed boost , CBN’s N132.56 billion T-bills auction records oversubscription by 327% , Nigeria pays $1.09 billion to service external debt in 9 months , Implications of the new CBN stance on treasury bill sale to individuals, Digital technology and blockchain altering conventional banking models - Emefiele  , Increasing food prices might erase chances of CBN cutting interest rate   , Customer complaint against excess/unauthorized charges hits 1, 612 - CBN , CBN moves to reduce cassava derivatives import worth $600 million  , Invest in infrastructural development - CBN Governor admonishes investors , Credit to government declines, as Credit to private sector hits N25.8 trillion, CBN sets N10 billion minimum capital for Mortgage firms, CBN sets N10 billion minimum capital for Mortgage firms , Why you should be worried about the latest drop in external reserves, CBN, Alert: CBN issues N847.4 billion treasury bills for Q1 2020 , PMI: Nigeria’s manufacturing sector gains momentum in November, CBN warns high foreign credits could collapse Nigeria’s economy, predicts high poverty, MPC Member, BVN, Fitch, Foreign excchange (Forex), Overnight rates crash after CBN’s N1.4 trillion deduction, Nigeria’s foreign reserves hit $36.57 billion; Emefiele keeps his word on defending the naira, CBN to support maize farmers, projects 12.5 million metric tons in 18 months, BREAKING: CBN Upscales Greenwich Trust Limited, grants it's operational license for merchant banking, AGSMEIS: CBN expand beneficiaries to 14,638., CBN expands access to mortgage financing

The Central Bank of Nigeria has taken proactive steps towards ensuring more flexible ways of engaging with operators in the payment solutions/fintech space, in a bid to tacitly regulate how operators churn out their new products and services.

To this end, CBN has introduced Regulatory Sandbox which is a formal process for firms to carry out live tests of new, innovative products, services, delivery channels, or business models in a controlled environment, with regulatory oversight, subject to appropriate conditions and safeguards.

It is expected that the CBN would stay abreast of innovations while promoting a safe, reliable and efficient Payments System to foster innovation, without compromising the delivery of its mandate.

What you should know

  • A regulatory sandbox is a framework set up by a regulator that allows FinTech start-ups and other innovators to conduct live experiments in a controlled environment under a regulator’s supervision. It encourages innovation that can improve the design and delivery of payment services.
  • No doubt, regulations around Fintech are still emerging and developing, there is still a high entry barrier for new entrants and it is expected that Sandboxes would present them with a safe testing environment and ease regulatory onboarding.
  • Sandbox is quite suited for new products, services or solutions that are either not contemplated under the prevailing laws and regulations, or do not precisely align with existing regulations.
  • Sandbox is intended to promote effective competition, embrace new technology, encourage financial inclusion and improve customer experience, with a view to engendering public confidence in the financial system.
  • The framework provides guidance on the establishment, the applicable rules and operations of a Regulatory Sandbox for the Nigerian Payments System, as well as providing standards for the operations of a Regulatory Sandbox, prescribes the processes and procedures for analysing, collecting, updating, integrating, and storing consumer data and information.

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