Bank customers dump savings deposits for investment in T-Bills

With rising yields on fixed instruments such as  Treasury Bills, (TBs) of between 12 and 14 percent, bank customers are shifting investments to the instruments, leveraging on the higher returns, BusinessDay investigations have shown.

This is against the current meagre rate of between 0.5 to 4 percent interests being paid on savings, in addition to withholding tax being charged on the interest by banks.

The development is capable of impacting negatively on the net interest income of banks as well as financial inclusion being championed by the Central Bank of Nigeria (CBN), as the banks will have fewer customers.

The CBN’s tightening monetary stance typified by hiher Monetary Policy Rate, (MPR) at 12 percent and the US tapering, have continnued to push yields on the interuments higher, making it more attractive to customers.

Indeed the 75 percent rate on cash reserve ratio, (CRR) on public sector deposits and 15 percent on private sector deposits, tend to enhance the position of the customers, as the era of cheap funds for banks to invest in the instruments is coming to an end.

  Segun Agbaje, managing director, GT Bank said at the recent presentation of the bank’s 2013 financials, that further tightening and possible review of the exchange rate by the CBN is possible.

“The impact on the industry includes higher fixed income yield, increased competition for non public sector deposit/higher cost of funding. Also continued government borrowing at higher yields may crowd out the private sector, with customers shifting from deposits to treasury instruments,” Agbaje said.

Bolade Agbola, Executive Director Cashcraft Asset Management ,said, “The US tapering has had profound impact on global economy as yield on instruments and performance of mature economies improve. In fairness to managers of our economy, the basis for defending the Naira was to minimise flight of hot money that came in to take advantage of abnormal yields of our treasury bills.

“Since the 2008/9 financial crisis, treasury  instruments have been offering higher yields than bank deposits, so the shift  has not  been surprising .That trend will continue, as political transition uncertainties are factored into the investment climate .Cost of funds for industries will  not slow down while the economy won’t witness the desired growth rate because of the security situation and the forthcoming election.”

Ayodeji Ebo, head, investment research, Afrinvest, observed that the recent inflow reversals spurred by tapering in the U.S drove yields northwards and triggered pressure on domestic currencies, as investors looked out for signs of growth in developed markets. He added, “Similarly, most emerging economies have responded by increasing benchmark rates, in an effort to tame the velocity of capital reversals, hence improving the attractiveness of domestic investments.

“The CBN however has chosen to maintain the benchmark at current levels (12.0%) which is closely tracked by yields in the fixed income market (currently between 13.0%-14.0%), 200bps below the average prime lending rate (PLR) to  keep lending rate at current level.

“An increase in the MPR will spur an increase in the PLR and fixed income instruments. This shift will slow down the amount of credit available to the private sector and impact the growth rate in the long run.”

Source: BusinessDay