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‘Many Nigerians are not aware of the opportunities in the Fixed Income Market’

In this interview, DIPO OLADEHINDE and BUNMI BAILEY speak with STEVE OSHO, Co-Managing Partner at Comercio Partners Limited and Managing Director at Comercio Partners Capital on the recently concluded Lagos State Series III Bond Issuance of N100 billion Financial Inclusion and TradeFi, an innovative online investment platform that not only allows investors access the fixed-income market with convenience but also educates them on investing.

Congratulations on the success of the new Lagos State Government Series III Bond Issuance. Can you bring us up to speed on the role Comercio Partners played in this series?

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We were one of the Joint Issuing Houses appointed by the State Government to oversee the bond issuance. As a Joint Issuing House, we were part of the team that advised the State on the terms of issuance in line with market conditions and other relevant factors, the necessary approvals required by regulation for the success of the issue, and liaised with the regulators on behalf of the State throughout the bond issuance process. But our role did not only stop there, it also extended to distribution, marketing and educating the investing public on the issuance, it’s terms and the process from the day the book building opened on 31st December 2019 to the date it closed on 17th January 2020.

Our role was also complicated by the market expectation for higher rates at a time when rates were generally declining. Lagos State wanted the 10-year bond to print within a range of 11.75percent to 12.25percent which was a major challenge to a lot of investors at that time. The reason was that investors wanted to get a higher premium over the sovereign security and at the time, a 10-year sovereign paper was trading between 11.40 and 11.50. As a result, there was a lot of pushback from the investors especially the Pension Fund Administrators (PFA) who were looking to get something far better than the maximum of 12.25 percentthat the State expected. There was also some resistance from some classes of investors as they expected Lagos State to revise the upper band of the return or interest rate of the bond upward to around 13 percent.

In addition, considering the fact that the issue was a first of its kind in terms of size (N100 billion) and no other sub-national entity had come up with an issue of that size before now. The issue itself demonstrates the trust and market acceptance enjoyed by Lagos State among the comity of states in the country. So for Lagos to come to the market at that point in time and give a rate guidance of 11.75percent to 12.25percent based on the advice of the Issuing Houses and the fact that they did not want to move above those levels, I believe it was quite audacious of them and at the same time the responsibility of us (the Issuing Houses) to ensure that the issue was successful, which we indeed achieved.

What is the significance of this Bond Series for Lagos-State?

There are a lot of gaps or deficits in terms of infrastructural development that Lagos State wants to finance. So, the bond will go into some projects under the Ministry of Environment, Water Resources, Education, and a lot more.

Nigeria’s Central Bank in its first monetary policy meeting for the year, raised the Cash Reserve Ratio (CRR) of banks, in what it says would help in mopping out excess liquidity in the system so as not to further add pressure on inflation which increased by 11.98 percent in December. Global rating agency Fitch, says the Central bank decision is credit negative for the sector. What’s your take?

I think it is a mixed bag of reactions. If you consider Fitch’s argument, it makes sense because what they are saying is that the Central Bank of Nigeria (CBN) has come out with a policy to increase the Loan-to-Deposit Ratio (LDR) which means that the apex bank is trying to make banks lend more to the real sector. But at the same time, the apex bank is trying to draw up a policy to adjust the CRR upward as contained in the communiqué of the said Monetary Policy Committee (MPC) meeting where the committee voted to increase the CRR. In sum, taking a lot of credit from the banks who are expected to be pushing that same credit to the real sector is negative because it means you are putting them in a very tight position.

But if you consider the argument of the CBN regarding the inflationary pressure on the Nigerian economy due the excess system liquidity created by the policy that restricted locals (local investors except the banks) especially PFAs, HNIs and a lot of asset managers from investing in Open Market Operation (OMO) security, you will agree that there was a need to mop up the excess system liquidity. As a result of the policy, locals are forced to the Nigerian Treasury bills space which are borrowings by the Federal government. If you look at the supply curve on that space, it has been within a range of N50billion to N100 billion, whereas you could have liquidity of as much as N200 billion in the market. That is why there has been a significant drop in interest rates across all securities.

We have seen a lot of credit extension to the real sector since the time they announced the policy to increase the LDR ratio. We have seen over N2 trillion extended to the real sector which is good and makes it an opportunity for a lot of small and medium-sized enterprises (SMEs) to finance their projects and at the same time contribute to GDP growth. But there is also a need to manage the excess liquidity that comes into the system and the only tool available to the CBN is an increase in the Monetary Policy Rate (MPR) or other tools to tighten liquidity in the market and tame inflationary pressure. And from their own point of view, I think adjusting the CRR upward is one of the right tools to use to moderate inflation without too much of a negative impact on the economy. We need to see how this will play out, but I think they are heading in the right direction.

How will it affect your ability to mobilize funds and the interest you pay on such funds?

I believe so far it is a good thing for us. Before the implementation of the new LDR rate and the restriction of access to the OMO market, funding usually flowed to banks and the OMO market. However, since the coming to light of the policies, funding flows have shifted to equities, bonds and other investments. We have seen PFAs, insurance companies, asset managers and HNIs looking for assets to invest in. The market for primary security issuance which is our playing field stands to benefit significantly through significant demands for new offerings. Accordingly, I think this development is good for us.

How will this new CBN decision affect financial inclusion?

I think the CBN has been doing a lot of things. If you look at the policy thrust that was rolled out last year by the CBN governor when his tenure was renewed, you will see that the apex bank has been trying to do a lot of things by using the monetary tools that is within its control to achieve results. We have seen a lot of credit extension to the agricultural sectors, adjustment to the CRR, policies aimed at reducing the borrowing cost of the government, restriction of non-bank investment in OMO, setting up committees to drive financial inclusion and engaging with a lot of banks and stakeholders to improve same. But I believe there are still some challenges because the number of unbanked population is still very high relative to the number of banked population. This issue has continued unabated because of the high illiteracy level in the country. The solution is not just limited to the government but to the banks, investment banks and finance companies. If you look at the demography of Nigeria, 40 to 50percent constitute the young and we still have majority of them unbanked because a lot of them are illiterates, we also have the cultural issues and background issues. So, these are the things that need to be addressed to ensure that the financial inclusion drive actually improves in Nigeria. And again the approval of the Payment Service Banks (PSBs) will help contribute more to how we can drive financial inclusion.

New VAT Charges which started on February 1 affected Nigeria Stock Exchange (NSE) transactions with an increase of 7.5%. How will this new VAT regime affect investors’ appetite on fixed income securities?

I believe the VAT increase is for people that invest in equity so it will affect them more.  For people investing in government securities, these securities are mostly tax-free.  So, the only thing that increased is the charges or fee that CSCS or Nigerian Stock Exchange (NSE) will be paying. You know they factor charges like the debit alert charges, transaction alert charge and other charges into clients’ accounts. So, the increase in VAT will affect investors in the equities space more. But for a fixed-income securities investor, especially those investing in sovereign issuances and state bonds, most of these investments are mostly tax-free.

In terms of advocacy, do you think Nigerians are aware of the benefits of investing in the Fixed Income market?

If we look at the number of educated Nigerians alone, I will say No. There are lots of people who are financially literate but when it comes to Fixed Income, they struggle to understand the space. I believe education is improving but we have to keep educating more people to know that there are other investments they can invest in apart from equities. We need to educate people that there are fixed deposit accounts that can give constant or better returns on investment over a period of time and most especially we need to inform people that its safe as well.

Also, with firms like Comercio Partners Limited coming up with investment trading apps that allow people to trade securities from the comfort of their homes, I think the education that the market needs is already being pushed out and a lot of information is getting out there.

TradeFi, your trading platform was launched last year, how has the participation of retail investors been on the platform?

Tradefi was one of the products launched into the market to bridge the gap between the institutional investors and retail investors, which was a gap we saw in the market. Don’t forget the combined experience of the Partners that started the business (Comercio Partners) is over 40 years. The App can be accessed on IOS, Android and desktop and it gives prospective investors access to invest in government securities such as treasury bills and bonds. It further gives prospective investors an opportunity to price at a very competitive rate close to what is being obtained in the intra bank market.

The app provides investors the confidence that they don’t need to walk to their banks before making investment decisions, they can actually sit down and look at were bonds and treasury bills are trading in the interbank market on a daily basis because we have an alliance with few of the banks or few of the primary dealers who are quoting on those instruments. We also have an arrangement with a Custodian where every transaction done is being held in custody for the client.

So when you log into the App, you can see your portfolio and also see the mix of portfolios you have either in bonds or treasury bills over a period of time.

Essentially, the platform creates an opportunity for a lot of people to learn more and also simulate a demo investment before going to the live room. It gives people the liquidity and comfort to trade at any point or carry out transactions.

What is the current size of your customer base and what is the value of transactions carried out so far on the platform?

When we rolled out we started with family and friends, who were testing with a minimum of N100, 000, and over time we have registered over 1000 users on that platform with over 180 active users currently. Apart from that, we started from zero investment to the point we received our first N100, 000 investments and today, we have achieved a turnover of four to five billion naira. Almost every day we have about 10 to15 new users and the platform has been strongly supported by FMDQ which gives us a lot of bragging right.

What is the next big news we will receive from Comercio Partners? And where do you envision Comercio Partners in five years’ time?

We are working on quite a lot of stuff which I might not be able to share with you at the moment. In terms of the strategic plan for the business, we are looking at opportunities in the financial space. Our mid to long term plan is to evolve into either a regional bank or a National bank.

We have seen a lot of gaps in the market and we are an institution that is driven by knowledge of the financial market and at the same time, we are product-driven. We also believe that in solving problems, we have to be very strategic in what we do most especially in terms of product innovation, service excellence, and at the same time, giving customers value for money.

What sets Comercio Partners aside from its competitors?

Our company started in June 2016 and it has been wonderful for us. We have been able to grow all the pillars of business that we set out to do. 

For us at Comercio Partners, we know what we want, where we want to be and what we want to do to get there. This knowledge is the force that drives us to become who we want to be. For us, the most important thing is having a good structure in place and at the same time ensure we hire the right staff to drive the vision with us.

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