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Empowering Retail Investors through Savings Bonds
ANALYSIS
The listing of the Federal Government Savings Bond on the Nigerian Stock Exchange will create liquidity and attract more retail investors, writes Goddy Egene
Retail investors in the nation’s capital market will always remember the month of March 2017. That was the month they had the opportunity to enjoy the benefits of investing in government’s bonds. Since 2008 when the equities market suffered a major crash, many retail investors have been looking for stable investment that can preserve their capital. Bond investment provides that opportunity. However, considering the huge amount needed to invest in bonds, retail investors have been shut out for a very long time.
However, the opportunity to enjoy the benefits of investing in federal government’s bonds came in March, when the Debt Management Office (DMO), began offering the Federal Government of Nigeria (FGN) Savings Bond. The FGN Savings Bond is part of the government’s programme targeted at the lower income earners to encourage savings and also earn more income (interest) when compared to their savings accounts with banks.
The first savings bond opened for subscription on Monday, March 13, 2017 and ran for 5 days. The bond had minimum subscription of N5,000 and a maximum of N50 million. It has a fixed interest rate that will be paid every quarterly and has a tenor of two to three years. At the end of the offer, N2.068 billion was raised from 2,575 investors.
The purpose of the bond is to deepen the national savings culture. It is aimed at providing opportunity to all citizens, irrespective of income level, to contribute to national development. It will enable all citizens participate in and benefits from favourable returns available in the capital market and diversify funding sources of the FGN.
DMO Explains Benefits
According to the Director General of DMO, Dr. Abraham Nwankwo, the floating of FGN Savings Bond was to encourage the public, especially low income earners to save, invest and earn commensurate returns from their investments.
He said the new instrument was part of the strategic plans for 2013-2017 with the objective to deepen and broaden federal government’s securities market in order to sustain the development of other segments of the bond market.
He said the savings bond would provide an opportunity for Nigerians across all income segments to invest in bonds.
He disclosed that bond would be announced by the DMO on the first working day of every month or as may be determined by the organisation from time to time.
Nwankwo said: “The rationale for the issuance of FGN Savings Bond are to deepen the national savings culture, diversify funding sources for the government and establish a benchmark for other issuers of bonds in the country. It offers guaranteed returns, helps to stimulate and deepen the savings culture among households and encourage financial inclusion. It enables individuals to enjoy those benefits which accrue to big investors in the capital market. Savings bond also helps to increase access to funds available for investment in the economy, thereby floating gross capital formation and increase in output within an economy.
He said: “Investors can subscribe through the over 100 stockbroking firms trading on the floor of the Nigerian Stock Exchange (NSE) and accredited by the DMO to act as distribution agents. Every month, subscription shall open same day the price is announced and investors will have five working days to put in their subscription through the distribution agents.”
Listing of the Bond on NSE
Although many investors and stakeholders saw the introduction of the savings bond as a positive development, some of them were apprehensive over how they can get liquidity from their investment if they needed to exit before the two year maturity period. However, the fears and apprehensions were put to rest when the bond was listed on the Nigerian Stock Exchange (NSE) on March 29, 2017.
Speaking during the listing of the bond, Nwankwo said this was the first time that the federal government ensured that the common Nigerians participate in a bond and about 75 per cent of these deals were from ordinary Nigerians.
“The savings bond, the first of its kind in Nigeria, was opened to investing public by way of offer for subscription over a five day offer period starting from Monday, March 13, 2017 to March 17, 2017 and N2, 067, 961,000 was raised from the retail market at 13.01 percent coupon.
“These are the people that subscribed for the offer. We are so excited and happy that Nigeria has broken the jinx to make sure that everybody in the country is part and parcel of activities in the capital market. And that is very consistent with the plan of the federal government. I repeat that whatever progress Nigeria is making should be inclusive and ordinary people should be part and parcel of it so we are happy that this aspect of the change agenda has been implemented and this will continue every month,” Nwankwo said.
According to him, the funds realised from the offer will be used to fund the budget deficit, and refinance matured existing/domestic bonds.
He explained that the bond refinancing makes it possible for the FGN Savings Bond will continue in perpetuity, and on monthly basis.
“The April 2017 offer will coming up on April 3, and it will continue every first week of the month. Nigerians will continue to benefit from the FGN Bonds. We congratulate the NSE for their continued initiative and operation for helping to make the listing a success,” he said.
Commenting on the listing, Executive Director, Capital Markets, NSE, Haruna Jalo-Waziri, said: “We are pleased to list the series 1 of this innovative investment offering that caters to the retail segment of the Nigerian capital market.” “The off take of the first tranche underpins the efforts of the Federal Government to continue to work with stakeholders to deepen the capital market whilst delivering value to investors at all income levels. We look forward to continue the collaboration with DMO to list subsequent series of the Savings Bond.”
Boosting Savings
Meanwhile, analysts at FSDH Research hailed the introduction of FGN Savings Bond as part of the efforts of the government to increase the Gross National Savings (GNS). They, however, said the current high unemployment level in the country, coupled with a drop in disposable income and the erosion of the purchasing power of Nigerians, have all contributed to low personal savings.
The analysts therefore urged the federal government to provide fiscal incentives such as removal of taxes on certain classes of investment schemes that encourage savings that will boost Nigeria’s GNS.
It is a consensus that all stakeholders that in the Nigerian economy will benefit if there are adequate savings that can be pooled together to fund long-term projects.
However, Nigeria has a low GNS when compared with most countries around the world. FSDH said to stimulate personal savings, the savers must be assured that the real value of their savings will be preserved in the medium to long-run.
“In addition, there must be safe investments to attract savings ensuring that the returns earned preserve real value for the savers. An environment of high inflation rate discourages savings and promotes current consumption. To stimulate business savings, the business environment must be competitive to enable businesses operate in a profitable manner. As businesses can fund future expansion from business savings (retained earnings), it thus increases their ability to raise future savings,” the analysts said.
They added that government and its agencies must be disciplined in creating institutions and structures that will promote government savings.
“This can happen through careful planning at the central and state levels. In the last few years, the operators in the Nigerian financial industry have created a number of products to stimulate personal savings. Some of these products are mutual funds and other wealth management products.
The regulatory authorities in the financial market have also strengthened their regulatory and supervisory roles in order to protect savers and investors in the financial market. Indeed the Nigerian financial market is in a safer and stronger position than before to attract savings to investments that provide attractive/higher returns, than the inflation rate,” they said.
The analysts noted that the harsh business environment resulting from weak infrastructure, inadequate foreign exchange and rising cost of production have resulted in increased cost of running business in Nigeria. All these have reduced business profitability and retained earnings.
“The view remains that government needs to do more to provide enabling business environment to make the Nigerian economy more competitive and better positioned to attract the needed investments necessary for job creation and increase in disposable income,” they said.