Business

Lower savings’ rate boosts prospects for money market funds

Growth

Minimum interest rate on savings deposit currently stands at 1.15% per annum

 

The further drop in minimum interest rate on savings deposit to 1.15 per cent per annum from 1.25per cent per annum, occasioned by the Monetary Policy Committee’s (MPC) recent reduction of the benchmark interest rate- the Monetary Policy Rate (MPR)-, is leading financial analysts to predict a surge in demand for money market funds, findings by New Telegraph show.

 

Citing the need to provide cheaper credit to boost economic growth and reduce unemployment, the Central Bank of Nigeria’s (CBN) MPC reduced the MPR to 11.5 per cent, from 12.5 per cent at the end of its meeting on September 22.

 

The development meant that the minimum interest rate on savings deposit had further reduced to 1.15 per cent per annum as the apex bank had, a few weeks earlier, cut the minimum interest  rate on savings deposit to a minimum of 10 per cent of MPR (then 12.5 per cent) – or 1.25per cent, per annum, from the previous minimum of 30 per cent of the MPR, or 3.75 per cent per annum.

 

Commenting on the CBN’s move at the time, the Chief Executive Officer, Financial Derivatives Company Ltd (FDC), Mr. Bismarck Rewane, said that while it will boost banks’ earnings this year, it would also widen negative real rate of return on investment as inflation was trending upwards.

 

He said: “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 has improved significantly over the years, with “savings deposit/GDP increasing to 4per 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 FDC boss suggested that the CBN’s action could affect savings culture, given that 1.25per cent per annum is the “lowest level of savings interest rate since 2013.”

 

Similarly, in their reaction, analysts at FBNQuest research stated: “For banks’  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 rate implied by the former interest rate regime.”

 

In fact, with inflation increasing for the twelfth consecutive month to hit 13.22 per cent in August, analysts are predicting that the reduction in MPR will lead to a further widening of the negative interest earned on savings deposit accounts.

 

According to such analysts, with treasury bills’ yields already at a record low, declining interest rate on savings deposit will push some bank customers to consider investing in alternative asset classes, such as Money Market Funds and equities.

 

 

Although the Chief Executive Officer, Nigerian Stock Exchange (NSE), Oscar Onyema, recently stated that the lack of high yielding investment instruments in Nigeria had drawn domestic institutional and retail investors to the equities market, New Telegraph gathered that many bank customers were showing a lot more interest in money market funds, especially mutual funds, due to the fact that they seem less complicated and difficult to understand than other asset classes.

 

 

Indeed, in a new report titled, “The Shifting Appetite of the Nigerian Investor: From Savings to Mutual Funds,” released last week, Coronation Research stated that mutual funds are growing rapidly and are quickly becoming the default destination for Nigerians’ savings.

 

The firm, which noted that the total value of money market and fixed income funds rose 11per cent and 59per cent respectively, in the first half of this year, said it expects mutual funds to become a large part of the savings industry, rivaling Nigeria’s pension funds in size in the next few years.

 

It pointed out that the total Assets Under Management (AUM) of Nigeria’s Mutual Funds (also known as Collective Investments Schemes) rose by 305per cent in the period between 2015 and 2019, more than doubling in inflation-adjusted terms.

 

According to Coronation Research, “as commercial banks progressively offered lower rates on savings accounts, more money switches to mutual funds. And the introduction of tech-based savings platforms introduces a new generation of young savers to mutual funds.”

 

Commenting on the growth of mutual funds, Head of Research at Coronation Asset Management, Guy Czartoryski, said: “The mutual fund industry in Nigeria faces two challenges. The first is risk management. The era of high returns from Nigerian treasury bills ended in 2019.

 

Today, investors need to invest in a variety of other asset classes in order to obtain a reasonable return, without becoming totally exposed to any one asset class. That means that investment management is more complex and more necessary than before.

 

“Second, there needs to be more information on fund performance in order to facilitate fund selection by investors and professional advisers.

 

Fortunately, the industry and its regulator are moving in this direction, preparing the ground for a hugely expanded mutual fund industry in future, and creating the conditions for a significant capital base for the nation.

 

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