Who Benefits More in Low Interest Rate Environment?
Godwin Emefiele, CBN Governor

Who Benefits More in Low Interest Rate Environment?

Blue-chip– companies with strong cash flow traction or credit rating- are refinancing their debt books with cheap interest rate instruments. Yields on fixed income are declining and banks margins have plunged as Nigeria’s central bank maintained a dovish stance.

However, Nigeria’s poor are missing largely in the low-interest-rate environment due to unlikely access to loans. Poor data has always been the clog in the wheel, but then poor mentality for loan repayment remains a big issue.

Instant credits providers love for high margin on consumers’ loans has not changed a bit, questioning if government policies are meant for Nigeria’s poor. Coronation Research in a note explained that interest rates have been falling all year and the government is running a deficit.

The firm asked if it is safe to assume that the government is issuing a lot more Treasury Bills and bonds than before.

“Not quite. Issuance has risen, but not much”, analysts at the firm hinted. Who is this thing call a low interest rate environment benefiting? In its explanation, Coronation said customer deposits are increasing rapidly in the banking system, thus generating a source of public sector money through the cash reserve requirement.

For every deposit, the CBN is expected to be a custodian of 27.5%. Obviously, 2020 has brought many things: a pandemic; a commodity price slump (now recovering); a global recession. For Nigeria, 2020 has also been the year when interest rates collapsed.

Coronation research explained that in January a 10-year Federal Government of Nigeria (FGN) Naira denominated bond yielded 10.40% per annum: today it yields 4.37%.

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The firm then asked: How has this affected government finances and lending by private-sector banks? It said one might have expected the FGN, which carries a substantial budget deficit, to have issued a lot of T-bills and bonds this year, given the opportunity to finance itself at low rates.

The strange thing is that the volume of outstanding T-bills and FGN bonds (including Sukuk bonds) has only risen by 11.8% year-to-date, or by N1.37 trillion (US$3.51 billion), it hinted.

Coronation said at the same time the size of the CBN’s open market operation (OMO) bill market has contracted by 43.9% year-to-date, or by N4.29 trillion (US$11.02 billion). So, the sum of FGN and CBN obligations in their respective securities markets has shrunk by N2.93 trillion (US$7.51 billion) year to date

Where has it gone?

Coronation stated that a very obvious effect of a large amount of money leaving the OMO market, being received by pension funds and banks -when not being received by foreign investors- is that it moves into the T-bill and FGN bond markets, causing rates to fall.

The face value of FGN bonds is some N10.55 trillion (US$27.06 billion) but their combined market capitalization is N16.69 trillion (US$42.80 billion). Coronation said this, however, does not tell where all the money has gone. It then hinted that detailed financial information from Nigeria’s largest banks supplies clues.

“Taking five leading banks (Access Bank, Zenith Bank, GT Bank, UBA and FBN Holdings), their total net loans rose by 11.03%, or by N1.17 trillion (US$3.01bn) in the first nine months of 2020 (9M 2020) to N11.80 trillion (US$30.27bn).

“However, their total deposits grew by 24.38%, or by N4.61 trillion (US$11.8bn) in 9M 2020 to N23.51 trillion (US$60.39bn). After almost zero loan growth during 2019 and lackluster deposit growth that year, this represents a massive increase in liquidity.

“Commercial banks are subject to the cash reserve requirement (CRR) under which (since October 2019) they leave at least 27.5% of their deposits with the CBN (banks we speak with sometimes state that it is higher than this in practice).

“This implies that a minimum (just taking our five banks at 27.5%) N6.47 trillion (US$16.58bn) of CRR funds available to the public sector, N1.27 trillion (US$3.25bn) more than at the beginning of the year.

“So, the public sector is taking back some of what it has lost from the contraction in its securities market. And low interest rates leave the way open to issue more bills and bonds later on”, Coronation stated.

Who Benefits More in Low Interest Rate Environment?