13 May 2017

Nigeria: What Federal Government's Savings Bond Means to Nigerians

Lagos — The Federal Government of Nigeria (FGN) recently launched the Savings Bond, which is being issued by the Debt Management Office on behalf of the FGN. This is part of Federal Government's programme to encourage small savers earn more income (interest) when compared to their savings accounts with banks.

Depending on the terms of the bond, the issuer, which is the federal government, is obliged to pay interest (the coupon) and to repay the principal at a later date, termed the maturity. Interest is usually payable at fixed intervals (semi annual, annual, and sometimes monthly).

The savings bond has a minimum subscription of N5, 000 and a maximum of N50 million. The benefit of this bond is that the interest income from the Savings Bond is tax-free.

Since the bondholder enjoys interest every quarter, it makes it possible for individuals to plan and save towards personal projects. The savings bond is considered liquid as it would be tradable on the Nigerian Stock Exchange. It can also be used as collateral for loans, offers guaranteed returns and encourages financial inclusion among low-income households. It enables individuals to enjoy those benefits which accrue to high-net-worth investors in the capital market.

While addressing leaders of market unions and leaders of middle income earner organisations in an advocacy/sensitisation workshop on the FGN Savings Bond in Onitsha, the Director General of the Debt Management Office (DMO), Mr Abraham Nwankwo, said the initiative, "FGNSB" is designed purposefully to favour the poor and give them a stake in government.

He said that over the years, the federal government had issued bonds, but it remained elitist bonds, which were sold as wholesale bonds to privileged individuals, corporate companies and organisations.

"All these super rich individuals bought it as wholesale bond, but the difference we have in the FGNSB is that we are making these bond available to ordinary Nigerians."

Bond is a long term investment. Experts and shareholders believe it pays more to invest in savings bond than equity at the moment because of the high coupon, since equity prices on the NSE is becoming too volatile.

Nwankwo said the bond will be "good for savings towards retirement, marriage, school fees, and house projects. It will provide opportunity for all citizens, irrespective of income level, to contribute to National Development, enable all citizens participate in and benefit from the favourable returns available in the capital market.

Experts were quick to caution however that for one to invest in bond, one needs to have surplus or extra money which is not in immediate need.

Prince Nnamdi, an independent shareholder, while expressing his delight about the bond said: "13 per cent on savings bond is a better offer when compared to 2 or 4 per cent interest from commercial banks in Nigeria. I will rather invest in the savings bond than keep the money in a savings account."

The savings bond works in such a way that your interest is paid into your account once every three months until after maturity, according to the DMO.

"As an investor, I can spend the interest as I like once it is paid to me. But the principal is still intact until after maturity," Nnamdi added.

It is pertinent to also note that inflation could encroach on the return a subscriber makes from the bond. When inflation rate is high, it eats up whatever returns the investor makes and when inflation drops, the investor higher benefits from the bonds in terms of yield. In other words, the government bond should always be considered when you don't have a better profit yielding venture.

While some analysts commended the savings bond issuance, others are concerned that it will be another beginning of trouble for the deposit money banks.

Ahmed Yusuf, CEO of Coral Spring Group, said the idea of the savings bond is ill-conceived as many of the banks in the country are suffering from the negative impact of the recession and poor liquidity.

Yusuf said the emergence of the savings bond is a serious competition for banks, and "there is no way banks can compete with 13 per cent offer by government."

He said with the savings bond, the banks now receive the bashing both from the lending and the deposit sides. From lending side, government is now the largest borrower in the system through securities and from the deposit side, no serious investors will ignore the savings bond offer that has 100 per cent guarantee.

Ahmed said it will be a difficult time for the banks as the aftermath of the TSA which mops up liquidity from the banks is not yet over.

The Managing Director of Agusto & Co, Vivian Shobo, while commenting on the initiative said, if well implemented, "I see savings deposits gradually migrating from the banking sector to these bonds. Everybody wants an enhanced return."

"Remember, savings deposits are the cheapest and most stable form of deposits in the Nigerian banking system. A new savings bond with a coupon rate of 13.5 per cent could make banks to increase their savings rate to prevent these deposits from leaving banks, which will impact margins that are already under threat. The new savings bond is almost like running a parallel savings bank," Shobo said.

A shareholder and former national coordinator, Independent Shareholders Association of Nigeria (ISAN), Sir Sunny Nwosu, warned that the introduction of the FGN savings bond is a mopping exercise to remove the entire saveable funds from the banking system.

"They forget that every bank pays tax on every savings income. How do they expect the banks to survive?"

Ugo Nwaghodoh, Chief Financial Officer (CFO) of UBA Group, in an interview with Daily Trust, however, reflected the thinking of the commercial banks when he said: "The size of the savings bond cannot take banks out, even if they start investing for the next 20 years. It is a big space for us to play; the savings bond will not go anywhere to satisfy investible funds."

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