Commercial papers have become a key method for obtaining short-term funding within Nigeria’s financial system.
FMDQ data highlighted that the volume of commercial papers issued in Nigeria increased in 2024, declining from 140 in 2023 to 133 in 2024.
This data is interesting because there was also a notable drop in corporate issuance by 12.2% to N790 billion.
However, retail interest has grown substantially according to Google Trends.
Commercial Paper (CP) is a form of short-term loan. This type of facility can last up to one year and typically ranges from 30 to 270 days. They are available on the Nigerian Capital market for tenors as long as 270 days.
They usually have a discount when they are issued and are redeemed at face value when they mature, just like Treasury Bills.
Large companies with solid credit histories and ratings also usually issue them. The relevant FMDQ Exchange platforms are where CPs are quoted, traded, and reported.
Nigerian corporations often prefer commercial papers for short-term funding rather than long-term debt alternatives. The urgent need to raise quick cash to maintain and grow their businesses is one of the problems that face entrepreneurs, thus pushing them toward commercial papers.
Guarantors, rating agencies, issuers, dealers, arrangers, issuing and placing agents, and collecting and paying agents are important participants. To ensure the seamless use of this financial instrument, entities serving in these capacities are essential to the issuance and redemption of commercial papers.
The yield from a commercial paper is the profit earned from the investment, usually expressed as a percentage. In Nigeria, yield calculations are based on either the discount yield method or the money market yield method. Investors in these papers receive interest for their capital.
The main factors influencing CP yield include the discount rate, face value, market conditions, and duration (tenor).
Prevailing CBN interest rates impact CP yields. Like most other financial instruments, higher interest rates tend to result in higher yields. Additionally, inflation also plays a role, as investors expect higher returns to compensate for the inflationary effect on a currency.
A lower yield is the outcome of a higher credit rating, which denotes lower perceived risk. Issuers with lower credit ratings, on the other hand, provide higher yields to draw investors. In Nigeria, purchasing CPs is comparable to trading on the international financial market.
CPs can be purchased by investors directly from issuing companies or through dealers and registered stockbrokers on the secondary market.
The first step in making CP investments correctly is to open a brokerage account with a respectable company under the supervision of an impartial licensed financial advisor.
Returns and investment duration: Commercial papers are an option to think about if you want a flexible investment that doesn’t tie up your money for years.
Lower Risk Compared to Stocks
Commercial papers (CPs) are safer than stocks because they are typically issued by large, stable companies, which lowers their risk. Although all investments carry some risk, CPs minimize this risk, making them suitable for short-term investing
Attractive Interest Rates
Many companies issuing commercial papers try to offer competitive interest rates to secure short-term returns. Purchasing CPs from large, reputable companies can provide decent returns, making them more attractive than bonds or high-yield savings accounts.
What are the downsides?
Like any investment, commercial papers come with risks. While they are safer than stocks, they are unsecured loans, which means you are susceptible to default or bankruptcy risks. This risk can be reduced by buying CPs from reputable, well-established companies.
Other risks include interest rate risk—where the value of some CPs may fall due to changing interest rates, and liquidity risk, where some CPs may not be easily tradable before their maturity date.
Conclusion
Currently, mutual funds, money market funds, insurance companies, and pension funds are the most active players in the CP market. This market has provided attractive, risk-adjusted returns while maintaining liquidity.
Nigerian residents can easily access investment opportunities through commercial papers. As part of a diversified investment strategy aimed at both short-term goals and long-term wealth building, CP investments can also be highly beneficial if one understands and manages those associated risks.
Key considerations include assessing the issuer’s credibility, clarifying personal financial goals, understanding one’s risk tolerance, and working with local, regulated financial professionals. Using CPs in your investment portfolio can help diversify risk and improve return stability.
As a first timer in investment… which of these portfolios can one invest in, to start with;?*mutual funds*bonds*stock*Realestate*dollar account..etc?
As a first timer in investment scheme,, which of these investment portfolio can you advise, I start with?… * Mutual fund *bond *stock ( commercial papers) Realestate?