FinTechs and Fund Managers are cashing in on Nigeria’s interest rate disparity

A recent message from a popular investment app in Nigeria offered its users an opportunity to earn a “higher yield” on a dollar-denominated investment.

The message read “a fixed-income dollar-denominated investment that gives you up to 8% USD annual returns. It takes the risk out of investing while exposing you to all the benefits of being invested, including higher yields than regular dollar savings accounts.”

A cursory read of the message suggests a very lucrative offer, after all, you can keep the dollars in your domiciliary account and earn next to nothing like it was under your pillow. But do not be baited, the more you look the less you see.

While they offer an impressive 8% return to an unsavvy investor, they make at least 6% on top of it without a single risk. Simply put, they pool money from all retail investors and hand it over to a larger fund manager, who then buys a risk-free sovereign dollar Eurobond that is currently earning 14%. They make, 6% while they generously give you 8%. Nothing illegal or exploitative, it is just the best deal any fund manager can wish for which is why they are all in on it.

With the inflation rate at 18.24% on a year-on-year basis in June 2022, a lot of investors are flying to safety by seeking investment in portfolios with minimal risk. But in between the race for capital preservation lies a major arbitrage movement.

Another very popular app with over 3 million users tells intending investors to invest and earn between 5-15% on any of its plans. What you earn depends on how long you are willing to part away with your money. For this company, it is simply the same model. In return for 15%, they pool the funds and lend to microfinance banks who then lend it to borrowers at 5% monthly or 60% annually.

The business model is similar to the majority of FinTech apps easy to download online. It is leveraging on arbitrage and roundtripping on interest rates aided by technology and well-packaged products that make investors believe they are being financially prudent and wiser.

In Nigeria, the interest rate disparity between savers, borrowers, and fees guzzling fund managers have widened over the years. While the central bank touts a monetary policy rate (MPR) of 14%, banks lend to their customers at 20% but accept deposits for under 2%. Nigerian banks offer their depositors a paltry 10% of the MPR as savings deposit rates. Just like the fund managers, they pool these funds and then lend them to borrowers at a whopping 20% plus interest.

But Fund Managers are the best at this. While banks still need to invest in risk appraisal techniques and deal with pressures from the CBN to lend more to the private sector, fund managers just pool the funds and plunge them into risk-free securities such as bonds and treasury bills. Sometimes, they lend to lenders who then lend to subprime borrowers at a widespread.

Microfinance banks have now seen their claims to the private sector (loan balance) grow from N253.8 billion in 2018 to about N514.7 billion in 2021 according to data from the CBN. The claims as of June 2022 are N1.1 trillion according to CBNs provisional data.

Data from the Security and Exchange Commission as of May 2022 reveal the total amount invested in Mutual Funds in Nigeria is about N1.2 trillion. Over half of the amount is invested in money market funds, such as bonds, treasury bills, etc. Nigeria’s pension fund asset under management is also estimated at about N14 trillion with over N9 trillion invested in FGN Bonds. Some of the managers of these funds all earn juicy fees while leaving their investors with inflation-ravaged returns.

Despite the lopsided share of earnings evidenced by some of these offers, experts will tell you this is how the market works. Making money is expensive and anyone who does it for you in your sleep deserved a fair share of the returns. What is however fair, depends on your investment appetite.