Godwin Emefiele, Governor, CBN.


The unattractive rates in the Nigerian fixed income market may soon begin to take its toll on the country’s economy as investors may begin to move their funds en masse to alternative investment destinations outside the shores of the country.

The decision by the Central Bank of Nigeria (CBN) to completely prohibit individuals and local firms from investing in both its primary and secondary Open Market Operations (OMO) auctions is impacting on deposit and lending rates in a way that have left the money market confused. Analysts believe that the capital flight will be fueled by the quest for a higher return on investment on cash and near-cash assets which is now likely to be more attractive in more stable economies.

BusinessHallmark learned that the CBN circular which was announced in October last year has resulted in a noticeable decline in the lending rates of commercial banks by about six per cent. Similarly, deposit rates paid by banks to customers have also dropped drastically to between two to three per cent, while the lending interest rate has nosedived from as high as 18% to around 11%.

Inundated with liquidity as a result of the CBN’s OMO exclusion policy, banks became afraid that accepting priced deposits would result in the decline of their loan-to-deposit ratio and subsequently resorted to refusing large fixed deposits from their customers.

As against 16%, Treasury Bills rates have dropped to around 3% and long tenor FGN bond trade at less than 10%. As the nation’s headline inflation rate jerked up, market analysts say the trend will further widen negative real return to all time. Inflation rate for January pitched at 12.13% as result of the monetary policy directive which has resulted in increase credits to the economy.

According to market data, the average real return on government securities has turned negative, racing behind the headline inflation rate. Experts say this is a disincentive to investment in securities. Analysts at Cardinalstone pegged return on investment securities at 6.5 per cent, trading below 12 per cent inflation rate in the country.

However, analysts at FSDH said the real interest rate gap remained flattish at -6.5 percentage points in January 2020, which was quite similar to December 2019 position. In a bid to reset the economy, the apex bank banned individuals and a number of financial houses from participating in its open market operation.

Analysts at FSDH restated that CBN OMO policies resulted in excess system liquidity which has led to declining rates on government securities since September 2019.

“It is expected that the lower interest rate environment will translate into lower lending rates and increased lending to the private sector”, FSDH held. They said this factor, coupled with CBN policy on LDR which has boosted lending to the real sector, could slow down price increase in the year.

In January, the inflation rate jerked up 15 basis points to settle at 12.13% from 11.98% in December. For 2019, the average inflation rate was 11.4%, but analysts at FSDH have an estimated 11.9% for 2020.

In their reactions to a low rate, high inflation environment, some investment experts have projected a diversified interest in the capital market as a safe haven for the fund. The real estate segment is expected to receive capital injection, analysts told BusinessHallmark.

Meanwhile, in its weekly report, the CBN tracked data showed that some deposit money banks have adjusted their funding sources. Deposits repricing has turned to defining factor in funds mobilization as banks shy away from taking high rate fixed deposits.

In a CBN February weekly interest rate report, the average rate on demand deposit at Access Bank was 0.20 per cent, Ecobank and Globus did 0.01 while it cost Wema Bank 1.01 per cent. In a decade, banks have been leveraging deep pockets to gain an unfair advantages compared with small and medium-size operators in the fixed income due to structural deficiencies.

Analysts said the CBN’s hawkish stance is veered towards the creation of a level playing field where quality strategy and business development would determine the earnings performance of Nigerian banks. In their separate investment outlook for 2020, both Tellimer and EFG Hermes see Nigerian banking sector growth to be unattractive, mainly due to perceived regulatory risk.

Their cautionary stance was informed by regulatory risk, though experts say foreign investors would be picky in their equities’ selection in 2020 more than ever. In the wake of increased regulation in the banking sector, experts said the CBN lifted regulation in order to correct deposit money banks (DMBs) performance anomalies of the .past

Three years ago when Nigeria’s economy slipped into recession, banks results were less affected as such as bulge balance sheets lenders pull strong earnings. Experts are of the view that performances of the Nigerian banks defy economic logic. According to views obtained from the industry, a number of financial experts attribute low valuation of banks shares in the stock market to lack of equilibrium point between banks and economic performance.

Some market analysts have hailed the CBN’s unconventional monetary policy approach given that whereas the monetary policy rate (MPR) has remained unchanged at 13.5 per cent, the discovery by the CBN of certain structural inefficiencies in the interest rate structure where OMO, which is monetary policy tool meant for only the banks and the foreign portfolio investors, had been infiltrated by the Pension Fund Administrators (PFAs).

The co-founder of Cardinal Stone Partners Limited, Mr. Mohammed Garuba, had pointed out that until the CBN decided to restrict its OMO auctions, it was only in Nigeria that the private sector and individuals were allowed to invest in the securities. He had explained that OMO auction was supposed to be strictly between the central bank and banks.

“It is a liquidity management tool. PFAs and the rest were never supposed to invest in OMO. For normal Nigerian Treasury Bills (NTBs), it is open to everybody; you fill your forms and go for auction. But OMO is 100 per cent at the central bank’s discretion. The central bank can decide to issue it anytime or any day they like. That is how it is everywhere in the world apart from Nigeria,” Garuba explained.

Dr Austin Nweze, economist and lecturer at the Lagos Business School noted that when the interest rate is low, money moves to the capital market and when share prices are low, money moves to the money market.

He said, “with the excess liquidity the CBN policy has left in the hands the deposit money banks, the banks will naturally not be willing to pay much in order to accept more deposit.”

He, however, cautioned the CBN “to do more strategic thinking and stop throwing money at every problem, adding that the apex bank should always think through policies before bringing them out to avoid being viewed as doing trial and error.”

Dr. Nweze described as unhealthy a situation where the CBN combines the works of both monetary and fiscal authorities.



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