At the beginning of last year, Silas Murphy, a Lagos-based lawyer, set an ambitious income target for himself.
That drive for more wealth creation almost went unfulfilled until the second quarter when his financial advisor told him to move his funds from commercial banks and invest them in fixed income securities. Murphy moved a N10m ($27,700) term deposit in a commercial bank paying 10% interest and invested it in a 180-day Treasury Bill (T-Bill) where he got 15%, with zero tax on the accrued income.
He also pulled out another $22,160 from his savings account, where he got 4% interest, and invested it in the monthly Federal Government of Nigeria Savings Bond (FGNSB) paying 14%. Government has intensified its usage of T-Bills and bonds to raise funds for key infrastructural projects as government agencies have struggled to meet revenue targets.
As at 30 September, T-Bills accounted for 30.23% of the Federal Government of Nigeria’s (FGN’s) domestic debt of $34.62bn, higher than the Debt Management Office’s maximum target of 25%. Aside from individuals like civil servants and private sector employees, commercial banks and asset management firms are also moving deposits from banks and investing them in fixed income securities.
It is therefore not surprising that the banks’ deposit base has dipped in recent months, and so have credits to Small and Medium Enterprises (SMEs). In addition, the Central Bank of Nigeria’s (CBN’s) statistics show that in the last five years, only 0.1% of banks’ total loans went to SMEs. Of the total $376.4bn loans disbursed to the economy from 2011 to 2015, only $442.5m was for the SMEs.
Stevens Azu, an SME operator in the food and beverages sector, said his application for a $554 loan to enable him to boost sales was rejected by his bank without reasons being given. He said the bank only called to inform him that the request was denied.
Another entrepreneur, Nancy Okon, gave up seeking an $831 loan four months after her application, as the bank kept asking her to be patient. “It takes longer than necessary for banks to approve SMEs’ credits. In several instances, the loans were denied after several months of waiting,” she disclosed.
Banks have linked the availability of limited funding to SMEs to the higher risk in lending to the sector, but the biggest challenge to SME lending is the rise in government debt, which is crowding out private sector access to loans. Kunle Ezun, a senior analyst at Ecobank Nigeria, said regular T-Bills and bonds’ issuances are cutting SMEs’ borrowing chances.
He said the attractive rates on government securities have motivated many investors, including banks, to invest in the segment. “Bank shareholders want improved returns which can only come from safe and profitable investments like T-Bills and bonds. Today, a large chunk of bank revenues comes from fixed income securities. Nearly 21% returns are earned at zero risk,” he said.
But he wants government to lower T-Bills and bond rates to discourage banks from investing in such securities. This would make more credit available to the private sector, boost job creation, citizens’ income levels and consumption volumes.
Richard Obire, a former executive director at Keystone Bank, said the T-Bills were used by the Central Bank of Nigeria (CBN) to mop up excess liquidity in the system as well as check inflation. He argued that such practices are no longer in wide use globally. He agreed with Ezun that government securities rates should be lowered.
“It is disturbing that lenders simply gather deposits and channel them to T-Bills and bonds instead of giving credit to SMEs and manufacturers. That practice can tackle inflation, 15.91% as at October, but can never support growth,” Obire said.
Private sector credits crowded out
Muda Yusuf, an industrialist, said investments in T-Bills and bonds have become more attractive than investing in manufacturing, agriculture and solid minerals combined. “It has created a serious crowding out effect on private sector credits. Even the financial institutions would rather invest in T-Bills and bonds rather than lend money to entrepreneurs. This condition has been created by the high cost at which the government borrows – the high yield on T-Bills and bonds,” he said.
Besides, the practice has led to high debt servicing. Government used $5.44bn to service debts in the 2017 budget, for example. Ola Belgore, managing director, Afrinvest Asset Management Limited, said the average rate for T-Bills is 15% and once it is marked up with a risk premium, it will hit 18 to 19%, which is a challenge within the operating environment, considering the rate manufacturers will borrow at.
Belgore added that many banks have realised that high-net-worth individuals require more returns. For instance, with deposits as high as $831,000, customers demand an 18-20% interest rate on their funds, whereas, the retail customer will happily accept 5%.
He advises banks to go for cheaper deposits at the retail end of the market, as these enable them to lend at cheaper rates and earn better margins. The manpower required by high-net-worth individuals, who typically demand one-on-one service, is huge. Hence, the retail customer generally seems more attractive. “But high-net-worth customers should be highly valued and receive the attention deserved, while technology is deployed to capture the millions of unbanked in society,” he adds.
Nigeria has consistently borrowed from the international capital markets where over the last year, it raised $7bn through Eurobonds. The country raised $1.5bn through Eurobonds in two tranches of $1 billion and $500m, and a fresh $5.5bn in the fourth quarter of last year.
National debt stock
The Debt Management Office (DMO) also issued a Sovereign Green Bond worth $29.6m, a $300m Diaspora Bond and $277m of non-interest bonds (Sukuk bonds) in the year. The positive outlook for crude oil prices this year and attractive yield curve for emerging market papers kept offers attractive to investors. Nigeria’s debt stock stood at $55.4bn as at 30 September.
But the borrowings have been justified by Patience Oniha, the DMO director-general. She said that the funds were pre-approved by the executive and legislative arms of government, and would be deployed to finance government projects as appropriate.
For the DMO head, the layers of approvals from both arms of government meant the borrowings were necessary and had been scrutinised. She insisted that as the borrowed funds are channelled to infrastructure development, the benefits of job creation and a stronger economy will impact positively on all Nigerians.