For many firms in the financial technology space in Nigeria, how not to walk into 2020 is with the treasury bill trading below 10 percent and the deposit money banks (DMBs) breathing down on retail lending as they race to meet the Central Bank of Nigeria’s 65 percent lending to deposit ratio target which is likely to reach 70 percent in 2020.
But that is the new reality they would face in the coming year and with inflation heading north once again, the future looks very grim.
In November, the treasury bill fell to its lowest level in 3 years following CBN’s OMO ban on domestic non-bank investors.
The apex bank had announced the exclusion of individuals and corporates from participation in its Open Market Operations (OMO) at both the primary and secondary. With the exclusion, only DMBs and foreign portfolio investors (FPIs) can participate in OMOs, while individuals and non-bank financial institutions will have to shift focus to treasury bills and other investment options. The CBN is hoping that the ban will boost lending to manufacturers especially.
It should be noted that OMOs are issued by the CBN for monetary policy management to control liquidity. The apex bank in recent times had opened the market to foreign investors to generate foreign exchange to maintain the value of the naira, but now, only foreign traders are allowed to hold OMOs.
The primary market auction rates on the 91-day and 182-day bills compressed to 7.7998 percent and 9 percent respectively in November, the first time both the short and mid-dated instruments would record single-digit rates since June 15, 2016. Also, the rate on long-dated 364-day bill cleared at 10 percent.
“The rates are not looking good, those who got the 10 percent should be happy,” said Adedeji Olowe, CEO of Trium Networks, a venture capital firm. “However, this is when other asset classes like equities and mutual funds, that provide higher returns will start getting a lot of interest.”
Fintech firms have long relied on treasury bill rates and other low-risk investments to generate revenue. Options other than treasury bills include agriculture, mutual funds, transport, and consumer loans. Treasury rates, unlike other rates, are paid upfront and investors are paid on maturity and do not rollover.
Several of these firms have made promises of 10 percent and above returns per annum to their users as part of strategies to attract new customers and ensure loyalty to the brand.
“Reducing promised returns to customers would be a problem for fintech firms, so the solution would be to look for other low-risk investments that can match promised returns while the companies remain profitable,” Sydney Aigbogun, CEO of Cashbox told BusinessDay.
Prior to November, the treasury bill had consistently traded at above 10 percent, even hitting a peak of 22 percent in 2016.
Promised rates at above 10 percent are also likely to make a startup look suspicious going forward as neither the bond market nor the stock market is yielding such returns at the moment.
“I want to believe every fintech company didn’t believe T-Bill would continue to be at 12 percent or higher, so they should have made plans for other low-risk investments,” Aigbogun said.
Banks have also invested heavily in treasury bills, using the market to maintain a high cash reserve which made them reluctant to give loans to small businesses and individuals.
ut the CBN mandate for DMBs to grow their lending to deposit ratio (LDR) to 65 percent and 70 percent in 2020, would see most of the banks shedding their reluctance and aggressively vying for more share in retail lending.
Already banks like Sterling Bank claims to have given out 79 percent of its deposits as loans as a result of the CBN mandate.
For most banks, fintech solutions present the most viable means of meeting the target and reduce the risk of exposure to higher non-performing loans. Financial technology also gives banks the opportunity to tap into consumer data sources to access creditworthiness and many others.
In the meantime, increased bank involvement in lending is bound to crash interest rates.
Azeez Lawal, head of Capital Markets & Research at Bancorp PLC, said the crash, however, is likely to have little impact if it is not followed up with commensurate fiscal efforts in infrastructure.
“In an economy stuck in a low growth cycle and susceptible to erratic and inconsistent government policies, we can only hope that the Government will handle its fiscal responsibilities with more urgency to reap the full rewards of a low-interest environment,” he said.
Olaoluwa Samuel-Biyi, cofounder of SureGroup also thinks the LDR will have little effect on the behaviour of banks in terms of which segments of the market they tend to.
“Online lending platforms emerged to serve segments traditionally underserved by banks and they remain underserved despite the LDR,” Samuel-Biyi said.
While the low-interest environment benefits the consumers, it also impacts the revenues of most online lending firms that depend on it.
For instance, a bank charging between 18 to 20 percent interest is far more attractive to small businesses than a credit firm which gives quick loans at 30 to 40 percent rates. As a matter of fact, GTbank now offers quick loans using their *737# code.
“I think the fintech firms just need to inspire confidence by disclosing the instruments they are investigating in, the risk profile of such investments and any insurance they provide against negative outcomes. I think most users will be comfortable with their strategies, and it is in the best interest of fintech firms for users to make their deposit decisions with an abundance of information,” Samuel-Biyi said.
While the fintechs are providing more information, it would be wishful thinking to wish away the increased pressure from banks in retail lending. For one, banks’ cost of funding is many times lower than the lending fintech firms. Their capital base also allows the banks to absorb more losses from bad debts. The LDR ratio increase still leaves room from regulatory arbitrage where the banks undertake asset substitution that is then classed as loans in the LDR computation.
According to a financial advisor who spoke to BusinessDay on condition of anonymity, an option for the lending firms would be to partner with banks to securitize their loan portfolio, although the banks may not accept as they usually have stricter loan requirements, to which accepting it may increase their non-performing loans.
