Negative real returns leave Nigerian savers underwater

Nigeria’s aim to accelerate financial inclusion for millions of its citizens that operate outside the formal banking system is bumping up against the obstacle of negative real interest rates which is keeping savers underwater.

Only 27 percent of adult Nigerians (aged 15 and above) had a formal savings account as at 2014, according to data from the World Bank.

The Central Bank of Nigeria (CBN), in collaboration with stakeholders launched the National Financial Inclusion Strategy in 2012 aimed at reducing the percentage of financially excluded Nigerians to 20 percent by 2020.

Such ambitions may be wishful thinking, as the inflation-adjusted or real rate of returns fell further into negative territory, as time (fixed) deposit rates crashed at the end of last week, on the back of ample liquidity in the system that fed into low interbank rates or NIBOR.

“Current low interbank rates mean that it is unlikely that banks will be motivated to increase their savings rates,” Razia Khan, Standard Chartered Bank’s chief economist and head of Africa global research, said in response to questions.

“For Nigeria’s banking system to operate effectively longer-term, it needs to be able to mobilise more savings efficiently.  Inflation may not be at these elevated levels for long, but once banks start lending again, they will need to be able to make it more attractive to mobilise deposits.”

NIBOR is the benchmark rate that Nigerian banks charge each other for short-term loans, ranging from spot to six months tenor, and is considered a useful proxy for liquidity in the domestic credit markets.

The overnight rate (the most active) was quoted at 1.58 percent as at October 20, according to data from FMDQ.

NIBOR fell as the CBN eased liquidity by cutting the cash reserve requirement (CRR) to 25 percent at its last policy meeting.

“We think the CBN has simply restored system liquidity levels to where they were pre- Treasury Single Account (TSA) debits, by releasing to the banks the naira equivalent,” Adesoji Solanke, Renaissance Capital’s banking analyst said in a Sep. 22 note.

Savers in Nigeria are essentially being penalised, as the interest rates they receive for deposits range from 2 percent for regular savings accounts, to 8 percent for fixed deposits.

This is below the September year on year rate of inflation of 9.4 percent.

Insufficient savings leaves Nigeria more vulnerable to outflows of funds that could be triggered by events such as an expected increase in U.S. interest rates or the recent removal of Nigerian bonds from JP Morgan’s emerging markets bond index.

Nigeria’s national savings as a percentage of Gross Domestic Product (GDP) or savings rate, was equivalent to 18.7 percent in 2014, according to data from investment firm, Renaissance Capital.

India’s savings rate is at 31 percent of GDP while China’s is 50 percent of GDP, World Bank data show.

While the Central Bank of Nigeria (CBN) led by Governor Godwin Emefiele has kept its monetary policy rate at a high 13 percent that should in theory make returns on savings more attractive, banks have failed to translate that into higher savings rates, calling into question the monetary policy transmission mechanism.

“Only an uninformed individual will save a huge amount of money for a long time in a bank,” said Okechukwu Adili, a motor parts dealer in the Trade Fair district of Lagos.

“I usually re-invest my profits in my business or use it to buy property in the East,” Adili said, referring to the Eastern part of Nigeria, from where he moved to Lagos.

Nigeria’s GDP growth in the second quarter of 2015 was a meager 2.35 percent, mostly on lower oil prices.

Boosting the savings rate, which can then be channeled into badly needed infrastructure, is a necessary condition to attain, before the nation’s economic potential can be fulfilled, according to most analysts.

“As long as interbank rates stay at these weak levels, it will be difficult to justify paying more on deposits. People are not incentivised to save, and it is financial development that ultimately suffers,” Khan said.

PATRICK ATUANYA