What government’s domestic dollar bond means for banks recapitalisation

The Federal Government recently issued a $500 million domestic US dollar bond with a maturity of five years and a fixed coupon of 9.75 percent per annum.

This is coming at a time when Nigerian commercial banks are engaged with recapitalisation exercises. The Central Bank of Nigeria (CBN) early this year, announced an increase in the minimum capital base for banks with international authorisation to N500 billion.

The CBN also raised the minimum capital requirement for commercial banks with national authorisation to N200 billion, and for those with regional authorisation to N50 billion. Merchant banks are now required to have a minimum capital base of N50 billion. Meanwhile, non-interest banks with national and regional authorisations must meet new minimum capital requirements of N20 billion and N10 billion, respectively.

The investors are lending money in dollars to the Federal Government for five years with a promise to receive 9.75 percent in interest every year, Ayodeji Ebo, managing director/CBO, Optimus by Afrinvest, explained.

What does the FGN $500m US Dollar bond issuance mean for banks

What does the FGN $500m US Dollar bond issuance mean for banks in view of the fact that the banking sector is engaged with recapitalisation exercise? How will this impact the recapitalisation?

“Although this is expected to trigger some withdrawals from the banking system as domestic residents with domiciliary account balances draw from their balances to invest in the issue. We do not expect this to serve as a drawback to banks’ ability to meet up with the recapitalization thresholds,” Okikioluwa Oladipo-Ajilore, assistant manager, global market, Parthian Partners, said.

Read also: 15 things to know about the domestic dollar bond

She said the FGN $500m US Dollar bond issuance in Nigeria is expected to have a positive impact on the economy at large, as this would support the FX liquidity. This issuance is targeted at Nigerian residents, Nigerians in diaspora, and qualified institutional investors.

“I don’t think they will have negative impacts on each other, rather positive impacts. Government wants to encourage holders of FX both in Nigeria and abroad to invest in government secured instruments. The fund will be used to meet some of the country’s FX needs which may allow the value of Naira to appreciate,” said Ayodele Akinwunmi, senior relationship manager, Corporate Banking Group, FSDH Merchant Bank.

Muda Yusuf, CEO of the Promotion of Private Enterprise, commented on the recent bond issuance, saying, “I don’t see any direct connection between the bond and bank recapitalisation. Its impact is likely to be minimal. The purpose of the dollar bond is to attract foreign currency into the economy. When comparing the offered rates to what diaspora investors could earn abroad from other investment options, the rates here are relatively attractive. Many in the diaspora have funds but lack reliable channels to send money home. This bond provides a credible investment opportunity with better interest rates compared to what they might get elsewhere.

“Another objective is to encourage those with funds in domiciliary accounts, which often don’t earn interest, to invest in the bond instead. However, there is a concern that potential investors might be deterred by issues related to the EFCC. Individuals who have illicitly acquired funds and stored them abroad might be reluctant to repatriate their money due to fears of legal repercussions. This bond represents a chance for Nigerians with funds abroad, earning minimal interest, to bring their money back and invest locally.”

Uche Uwaleke, a Professor of Capital Market at the Nasarawa State University, said it provides an opportunity to earn risk-free return on investments given that dollar deposits with banks attract little or no interest.