Following the implementation of the new policy on the use of commercial paper (CP) and bankers’ acceptance (BA) in Nigeria , the monthly transaction value of CP has fallen to about N2 billion, down from about N190 billion before the policy became effective. The new guidelines were introduced by the Central Bank of Nigeria (CBN) in November 2009 “in exercise of its statutory powers under Section 33 (1)(b) of the Central Bank of Nigeria Act 2007.” The CBN introduced the new guidelines on CPs and BAs in 2009 but they became effective in January 2011.
Experts say that the new policy became necessary due to the infraction witnessed in the use of CPs and BAs. Some financial institutions were found to have repacked customers’ deposits as CPs, which means the amount of insurance premium paid to the Nigerian Deposits Insurance Corporation (NDIC) at the end of the year would reduce. This is because the deposit insurance premium paid by banks to NDIC is based on the total deposits liability at the end of the year.
Usoro Essien, analyst at the Associated Discount Houses Limited, is of the opinion that the CBN wanted to sanitise the money market. “The new guidelines are to ensure uniform practice and correct treatment of commercial papers (CPs) and bankers’ acceptances (BAs) by banks and discount houses in Nigeria. It had become imperative to issue these guidelines in order to deepen and facilitate the effective and efficient functioning of the Nigerian money market”, he said.
The CBN through its circular, defines a CP as “an unconditional promise by a person to pay to the order of another person, a certain sum at a future date. Such an instrument may or may not carry the bank’s guarantee. Where the bank guarantees the CP to make it more marketable in the money market, the instrument acquires the force of a BA and the bank incurs a contingent liability.” Both CPs and BAs are usually issued as discounted instruments with short tenors.
An analysis of the monthly economic reports of the CBN has revealed that the Nigerian financial system recorded a total of N2.39 trillion worth of CP transactions in 2011, whereas the worth of CPs recorded by the same system sharply fell to N979 billion at the end of 2012. The sharp decline was more noticeable starting from June 2012 when just about N2 billion worth of CP transactions were executed compared with N178.90 billion recorded in May 2012.
From all indications, the effect of the policy was more felt in the second half of 2012. This is because from January 2012 to May 2012, the Nigerian financial system recorded a total of N967 billion worth of CP transactions, whereas a mere N12.2 billion worth of CP transactions were done from June 2012 to December 2012. With regard to BA, the yearly transaction value fell to about N272 billion in 2012 as against about N850 billion traded by 2011 year end.
“The monthly transaction value of CPs fell sharply by the second half of 2012 because that was when most of the existing contracts mature”, responded Fatai Asimi, analyst at Financial Derivatives Company (FDC). “June being the end of half year for banks, there is tendency for banks to try to comply with CBN rules, as they will most likely carry out half year audits. Based on this, we are likely to see a sharp decline too between November and December in preparation for the full year audit. But this notwithstanding, the access to Bank of Industry (BoI) money by most companies, played a significant role too. The interest rates on CP range from 15 percent to 20 percent, whereas BoI’s intervention fund charges single digit. Therefore, when BoI’s fund became available, most companies opted for it”, he said. The Bank of Industry has disbursed several billions of naira from the intervention funds to revive firms in the aviation, textile and manufacturing sectors.
However, the new CBN policy is not without its side effects. According to Usoro Essien, “unfortunately, the CBN’s 2009 circular as regards the issuance and treatment of CPs and BAs, whilst trying to check the abuse in the system, indirectly diminished the opportunity for discount houses to invest in alternative assets outside government securities and this has spurred a resultant drop in income.”