I have a tough call – most fintech startups in saving sub-sector in Nigeria will collapse in 2020! The reason is simple: the Central Bank of Nigeria (CBN) has done a coup. Yes, with the treasury bills (TB) rate now 5% for a 90-day tenor, I expect massive dislocation in the ecosystem. These startups have accepted savings, promising “investors” and “savers” north of 10.5% annual interest rates, hoping the high TB rate party would continue; the TB rate was projected by some to stay above 14% in coming quarters.
As if the low yields on T-Bills aren’t enough, CBN Director, Banking Supervision Department, Mr. Hassan Bello mentioned that The Central Bank of Nigeria will increase banks’ Loan to Deposit Ratio to 70% by 2020, he gave this hint during the week while speaking at the 2019 workshop for Finance Correspondents and Business Editors.
The Monetary Policy Committee (MPC) had noted in November an increase of N1.17 trillion in absolute gross credit between May and October, this was attributed to the adjusted LDR for deposit money banks. Manufacturing was the largest beneficiary, accounting for N460 billion of the increase. Consumer loans shared N360 billion from the total.
But now the government has made TB 5%, these startups would not just lose money, paying the 10.5% rate, they would be exposed to take more risks by putting that money they’ve collected via short-term savings, on safe long-term investments. In Nigeria, few of such safe investments are available: TB was the best deals in town, but now it is gone.
More so, the lending fintechs would also be forced to reduce rates as all lending rates would drop with the dropping of TB. The implication is that some of the rates they have quoted for investors as they raised capital may not be feasible anymore. Yet, this may be a good thing: if rates are low, more customers can come to patronize them. But they have to readjust to take advantage of the new opportunities.
Similarly, I expect many banks to see stress as they open their books to move from extremely low risks on TB to new investments by putting money in companies.The target CBN is giving them on LDR (loan deposit ratio) is mind-blowing, and most will have to revise their playbooks to thrive.
Here are ways this new policy on TB will play out:
- Banks are going to see positive movements of their stocks. With the option of TB gone, equities would be a key option. Banks are usually the most preferred in Nigeria as the banking sector remains the most developed and liquid in the Nigerian Stock Exchange. Yet, investors would be watching on how banks would manage the risks associated by putting capital on small and large companies, hoping the loan default rates stay low.
- Borrowing would become easier for companies. Typically, most rates were benchmarked with TB. Now the TB is lower, it means debts will become cheaper. In other words, if a company was to borrow from a bank, and with the option of TB not being a good option (very low at 5%), banks have limited options to put capital. The implication is that companies can easily negotiate better loan terms since the other key option for banks was 5%. When you know that is the case, getting a loan at below 15% from a bank becomes easier.
- Servicing government debts will be cheaper. Interestingly, this low TB rate would make it easier for government to borrow and service its debts. Nigeria at both federal and local levels would be servicing tons of debts, and this low rate regime would make things easier.
- CBN lending rates to bank remain important. Though CBN has cut TB rates, another important metric to examine is the rate banks are getting capital from CBN. If banks get at 11%, the impact of TB would be muted. If a bank gets funds from CBN at 11%, I expect 1% to cover insurance for the funds. By the time they add operational costs with small profits, 17% becomes the floor to lend. So, despite the reduction in TB, what will drive lower rates in lending in Nigeria is the rate CBN is lending to banks – today, it is about 13.5%. (I explained this deeper here).
See it this way: if a bank gets capital from CBN at 14% (the current rate) and has to keep 1% to meet required ratios from NDIC (the deposit insurance commission), by the time it takes care of operating expenses, it cannot practically lend below 17%. Then imagine if the bank has started with 2.5%, you will then experience lending interest rate of say 5% in Nigeria.
The low TB rates would do one thing: it would put pressure on banks to deploy capital in riskier investments like lending to SMEs (small and medium scale) companies in Nigeria. That is a good thing as lack of growth capital remains a major challenge in the Nigerian economy.