Capital market experts have warned of imminent liquidity crisis against deposit money banks following the 13.5 per cent coupon rate offer on government bond, against four per cent interest from commercial banks in Nigeria.
Indeed, the experts who spoke with The Guardian, described savings bond as a serious threat to banks, noting that no serious investor will ignore a bond that has 13 per cent offer and 100 per cent guarantee.
They argued that the development could undermine confidence in the volatile equities market, as the banking stocks constitute 13 per cent of the overall market capitalisation on the Nigerian Stock Exchange (NSE).
Furthermore, investors’ who were supposed to take a position on the banking stocks with the current bullish situations may opt for the savings bond that offers guaranteed returns.
The Federal Government had on March 13th, launched the Savings Bond, which is being issued by the Debt Management Office (DMO), on its behalf. The savings bond has a minimum subscription of N5,000 and a maximum of N50million at 13 per cent coupon rate. The benefit of this bond is that the interest income from the Savings Bond is tax-free.
The bondholder enjoys interest every quarter, which makes it possible for individuals to plan and save towards personal projects. The savings bond is considered liquid, as it would be tradable on the NSE.
It can also be used as collateral for loans, offers guaranteed returns and encourages financial inclusion among low-income households. It enables individuals to enjoy those benefits, which accrue to high-net-worth investors in the capital market.
The DMO had encouraged Nigerians to invest a minimum of N5,000 and maximum of N50million in FGN Savings Bond, adding that any amount higher than N50million should be invested in the old bond, known as Federal Government of Nigeria Bond, FGNB.
It also urged willing subscribers to do so through stock-broking firms trading with the NSE and accredited distribution agents licensed by the DMO. The Federal Government also attached numerous benefits to the savings bond to make it more attractive to the investing public.
For instance, while other bonds like treasury bills is determined by the forces of demand and supply, savings bond rates is determined by the DMO despite that it is traded on the stock market.
The DMO also said treasury bills can no longer be sold to retail investors but will need at least N50million to invest in the bond.
But stakeholders argued that seeing as the TSA mops up liquidity from the banks, a new savings bond with a coupon rate of 13.5 per cent could make banks to increase their savings rate to prevent losing these deposits, which will impact on margins that are already under threat.
They suggested that government should issue a directive that investors’ on savings should no longer pay taxes to boost deposit. They also stressed the need for banks to become more proactive and explore other means of generating income aside savings, especially through the e-services platform to enhance profitability.
According to them, the idea of the savings bond is ill-conceived, since many banks are suffering from the negative impact of recession and poor liquidity.
More so, they believe that it pays more to invest in savings bond than equity because of the high coupon, since equity prices on the NSE is becoming too volatile.
The Founder, Independence Shareholders Association of Nigeria, Sunny Nwosu, argued, “What the Federal Government has done it to use it to wipe off liquidity in the system. If banks give five per cent and federal government 13 per cent, every investor looks forward to a bulky pocket. And they will automatically go for the savings bond.
“The Federal Government has used it (savings bond) to rob banks of their deposits. Banks should tell government that they are destroying their business, which they pay taxes on while the bond does not. Nigerians will always go for one with higher return especially during a recession. Government wants to attract and mop up as much as they can.
“Unfortunately, the NSE does not see it from that angle, but instead is praising government for the listing without seeing the detrimental effect of the bond. It is a misplaced position for NSE to rejoice that these bonds are being listed on the Exchange.
“Government has taken a lot of money from the system, so they should allow investors on savings not to pay tax, to enable banks attract more savings into the system.”
The President, Renaissance Shareholders Association, Olufemi Timothy, noted that the FGN savings bond will surely attract huge funds to the detriment of the banks.
“Yes, the savings bond will surely attract funds. It is a deliberate policy to reduce funds in circulation. Higher interest rate will definitely affect equities investment but banks should know where to make their profits apart from savings.
“They give loans at between 21 to 30 per cent interest from fixed deposits, which they got at 10 to 13 per cent interest. So, banks may not have much problems but the equities market would.”
The President, Proactive Shareholders Association of Nigeria (PROSAN), Taiwo Oderinde, admitted that the savings bond would constitute a big threat to deposit money banks, adding that the development would “put the banks on their toes” by compelling them to explore other sources of income.
“It is true that the bond would impact negatively on banks deposit but I believe that banks have many sources of generating incomes. Let people diversify their sources of income too. This will make the banks to become more proactive on how to be more creative in generating incomes. Many banks generated billions of income through their e-services platform in the 2016 financial year. Banks should have other ways of making it up.”