Nigerian Money Market Funds (MMFs) are witnessing an unprecedented spike from retail and institutional investors alike.

The funds have evolved from being a niche saving vehicle to one of the hottest financial assets. Major money market funds are currently churning in awesome yields significantly beating Nigerian savings bank accounts.

Money Market Funds now represent over 60% of all mutual funds in the Nigerian market – as investors shift from potentially risky equities to capital protection.

The Nigerian central bank’s aggressive monetary tightening was aimed to fight rising inflation, save the largest West African economy and stabilize the Nigerian FX market, which has systematically increased yields in Nigerian money market.

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Leading Nigerian Money Market Funds are delivering impressive, annualized returns ranging from 15% to 22% – a 2-fold increase from the 7-10% offered a few years ago.

The driving forces

These figures are underpinned by the yields on the underlying short-term debt instruments: The MPR currently stands at 26.5% following various hikes by the MPC. Nigeria’s 364-day Treasury bill is trading between 18% and 22% at the last auction, and the private sector has had to be responsive.

Commercial paper issuances from top-quality names such as top banks and other conglomerates are trading between 22% and 25%.

Nigerian SEC-registered funds allocate assets roughly in this manner to keep earning attractive returns and, at the same time, offer investors very low default risk:

  • 35% – 45% Sovereign Debt: risk-free federal government Treasury Bills form the base of our fund to serve as our fund’s safety anchor.
  • 30% – 40% Tier-1 Commercial Papers: short-term debt papers from top-rated corporate firms like MTN, Dangote, or high-quality state governments like Lagos, Rivers State.
  • 15% – 20% Bank Deposits & CDs: high-yield certificates of deposit from tier-1 commercial banks.

Interest rates on traditional commercial bank savings accounts have been extremely low and rarely exceed 2-5% annually, meaning that holding idle cash in a commercial bank is simply a huge and unnecessary opportunity to cost.

Retail and institutional money is rapidly exiting this part of the market and flowing into mutual funds for protection from Nigeria’s sticky inflation.

Though investors want access to the attractive CBN direct Treasury bill yields, they usually come up with high minimum subscription requirements in the primary market (e.g., N5 million and above).

Nigerian Money Market Funds are more like a “crowdfunding” system. Here, many thousands of “small-time” investors use this opportunity to participate in yields greater than 20%, but with much lower minimums (N1,000 to N10,000) via fintech and asset management platforms.

CBN strategy has a two-pronged objective: to keep inflation down and shore up the value of the Nigerian Naira.

Investors are choosing to hold Nigerian Naira assets as the CBN keeps rates in the money market extremely attractive, such that they are significantly higher than inflation rates and offer positive real returns for those with cash.

Markets have observed an exchange rate that has been relatively stable around the N1,360 – N1,400/$ range this year, making it easier for retail to hold naira denominated assets and worry less about naira’s devaluation.

Since the naira isn’t 30% and 40% down every few months, the current market money fund return remains attractive despite a moderation in yields lately.

This basic currency stability transformed the naira’s money market instruments from a “wealth-destructive sink” into a terrific low-risk wealth accelerator for retail Naira flows.