Business

Customers fret over interest on savings amid inflation

 

Tony Chukwunyem

 

Following Central Bank of Nigeria’s (CBN) recent downward review of minimum interest rate on savings deposit, savings account holders are doubting if it is still necessary maintaining them, findings by New Telegraph show. This is hinged on the belief that inflation is generally expected to continue its upward trajectory in the coming months.

 

The apex bank recently cut the rate to a minimum of 10 per cent of the Monetary Policy Rate (MPR) or 1.25per cent per annum.

 

Citing what it said is its satisfaction with the recent declining trend in market rates in the banking sector, following the implementation of policies aimed among others at stimulating credit flow to the real sector, the CBN in a circular to all lenders, last Monday, directed that  the minimum interest rate on savings deposit be reduced to 10 per cent of the benchmark interest rate-the MPR- or 1.25per cent, per annum, from the previous minimum of 30 per cent of the MPR, or 3.75 per cent per annum.

 

The new savings deposit rate regime took effect from Tuesday, September 1, 2020. Analysts at FBNQuest research had pointed out while commenting on CBN’s directive that the move would negatively impact bank customers as it will widen the negative interest earned on savings deposit accounts.

 

The analysts stated: “For bank customers, given an inflation rate trending above 12 per cent (12.8% July 2020), the negative interest earned on savings deposit accounts will widen to -11.5 per cent from the -8.7 per cent rate implied by the former interest rate regime.”

 

Also commenting on the apex bank’s directive in his Lagos Business School (LBS) Breakfast Session, September 2020, the Chief Executive Officer, Financial Derivatives Company Ltd (FDC), Mr. Bismarck Rewane, said that while the development would boost banks’ earnings this year, and also widen negative real rate of return on investment, given rising inflation.

 

The FDC boss, in a presentation obtained by New Telegraph, said: “Lower savings interest rate will boost banks’  earnings in 2020 most especially in Q4.

 

Banks with relatively higher funding costs and high savings mix (will) benefit more – Zenith (23.65%), GTB (27.26%). Banking equities could be a net beneficiary given scope for continued dividend payments and unwillingness of PFAs to take additional duration risk.

 

“Lower interest rates at a time of rising inflation will further widen the negative real rate of return on investment. It could increase the marginal propensity to consume and stoke inflationary pressures; naira weakness will increase capital flight out of Nigeria.”

 

Noting that savings penetration and growth had improved significantly over the years, with savings deposit/GDP increasing to four per cent in 2019 from three per cent in 2013, growing three times faster than other deposits and accounting for 23 per cent of system deposits in 2019 compared to 14 per cent in 2013, the financial expert suggested that the CBN directive could affect savings culture, given that 1.25 per cent per annum is the lowest level of savings interest rate since 2013.

 

Although the FBNQuest analysts stated that despite few investment outlets occasioned by the low interest rate environment, some bank customers might be encouraged to take a second look at alternative asset classes such as equities. Most of the customers, who spoke with New Telegraph on the issue, said they would not be considering investing in the stock market as an alternative to the low savings interest rates.

 

For instance, a Lagos-based civil servant, Mrs. Uju Okonkwo, said that while she was unhappy about the low interest rate on her savings account, she does not like the risk that comes with buying stocks.

 

She said: “Yes, it is true that I’m not at all happy that the interest rate on my savings in the bank is 1.25 per cent per annum when inflation is about 13 per cent. If I can find a business that will give me quick and higher returns, of course I will quickly move my funds from the bank. But the stock market is not one of the areas I’m looking at right now.”

 

According to her, the low savings interest rate is particularly annoying given that lending rates are still in double digits. “The banks pay 1.25 per cent interest rate on your savings, but when you want a loan, they will charge interest rate of over 20 per cent. Customers are not getting a fair deal,” she said.

 

The CBN had in its April 2020 Economic Report released last month stated: “The spread between the average term-deposit and average maximum lending rates widened by 0.2 percentage point to 24.4 percentage points at end-April 2020.

 

With inflation at 12.34 per cent in April 2020, these implied negative real rates for deposits, but positive real rates for the prime and maximum lending rates.” Significantly, also expressing his disagreement with the downward review of the savings deposit rate, financial analyst, Dr Boniface Chizea, said in a facebook post that “it is difficult to rationalise a minimum savings deposit rate at 1.2 per cent against the background of an inflation index of close to 13 per cent.

 

The smaller saver, whose goal is to put some money away prioritising safety of deposits and, therefore, availability as at when desired, might barely notice what is happening now. “But no corporate treasurer would place Deposits at such value erosion rate as value is lost due to the prevalent inflationary regime at over 10 per cent per annum.

 


Sometimes the consciousness of the imperatives of the stability of savings deposits on economic growth are not readily shared. This is the source which enables banks to book tenured credit as current accounts are volatile as they are payable on demand and time deposits are the costliest source of funding for the banks,” he noted. Analysts noted at the weekend that the CBN directive could also have a negative impact on Nigeria’s savings culture.

 

According to the latest Nigeria Interbank Settlement System (NIBSS) Industry Customer Bank Account Data, the number of inactive bank accounts rose by 0.7 per cent or 300,000 to 45.87 million in Q1’20 from 45.57 million in Q4’19.

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