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Massive capital flight hits Nigeria as deposit rates crash to 3%

By Omoh GABRIEl and Babajide KOMOLAFE
The Nigerian economy is facing another round of financial haemorrhage as Nigerians and corporate bodies are moving funds massively out of the country as well as from naira to dollar.

Sanusi

Vanguard investigation showed that Investors have started to move their funds out of the country to neighbouring countries in response to falling deposit rates which crashed to three per cent in the last two months though the CBN monetary policy rate is 6 per cent.

The move is informed by the quest for higher return on investment on cash and near cash assets which Vanguard gathered is now more attractive in Ghana and West African countries where interest rate on deposit is about 14 per cent compared to the 3 per cent or even less Nigerian banks are offering depositors now.

A survey of banks’ deposit rates by Vanguard last week showed that the average deposit rate for 30 days term deposits of below N100 million is about three per cent.

In the last five weeks of January 22, 2010 to 5th March, a total of $6.734 billion went out of the country. While about $1.383billion went out in the week ending 22nd January, the amount of foreign exchange flowing out of the country rose to $1.457billion for the week ending 4th February.

Capital out flow from the country further rose to $1.740billion for the week ending 12th February and moved downward to $1.091billion for the week ending 26th and a little further down to $1.061 billion on the 5th of March.  This was occasioned by  the crash of interest rates in the money market as customers are moving out their deposit.

Bank treasurers have attributed the crash of interest rates to the ongoing CBN reforms where over N600 billion of bank deposit is in the CBN vault at 1 per cent interest rate as banks have refused to lend just as investors are holding back their investment decision.

The movement of funds out of the country comes by way of Nigerian residents buying up dollars with their naira and moving it off shore.

The trend became noticeable in October 2009 where in fact in a matter of weeks several billion of dollars were purchased through the banks and bureau de change. Available figure suggest that during the five weeks period a total of $4.648 billion were purchased through the CBN Dutch auction while a total of $1.344 billion were done through direct remittance by the CBN. Of the $6.734 billion that went out of the country through official means only $100.339 million had letters of credit backing suggesting that bulk of the out flow was capital flight.

The movement of funds is also in travels- business travel allowance, personal travel allowance, direct remittances etc. According to data obtained from CBN in the eight weeks the total amount of foreign exchange that went out through travels amounted to $72.067million, Debt service/payment $799.194million.

Though some banks still pay up to 4.5 per cent, other banks pay between 1.25 per cent and 3.5 per cent. Previously, especially prior to the ongoing banking reforms deposit rates hovered between 10 per cent and 14 per cent.

The sharp decline in deposit rates, occasioned by the over N400 billion excess liquidity in the system, as well as the general unwillingness of banks to lend (credit squeeze), has however triggered massive withdrawal of deposits from banks. “I can tell you we have lost about one third (33 per cent) of our deposits”, a branch manager in one of the top four banks told Vanguard.

Investigation also revealed that across the industry depositors are liquidating their funds upon maturity, moving them to investment outlets offering more attractive returns.

A senior banker and assistant general manager however told Vanguard that some depositors are moving their funds out of the country where the deposit rates are still high.  He said for example in other West African countries like Ghana; the deposit rates are still as high as 14 per cent.  “If this trend should continue we begin to experience serious capital flight from the country”, he said.

Confirming this development, the chief executive of a bank in Ghana told Vanguard that there have been significant demands for investment in bond and money market instruments from Nigeria since the beginning of the year.

He said for example the two recent bonds issuance by the Ghanaian government were hugely oversubscribed and a significant portion of the demand came from Nigeria. The three year bonds offered 19 per cent interest rate quite higher than the average deposit rate in Nigeria or the interest rate on FGN bonds.

Further investigation revealed that in Ghana, deposit rates on the average are between 15 to 16 per cent. It was gathered that it used to be as high as 25 per cent but declined recently following the reduction in Treasury bill rates by Bank of Ghana from 19 per cent to 15 per cent.

Further investigation revealed that one of the major beneficiary of the crash in banks’ deposit rates are finance companies. In the finance companies sub-sector interest rate for N500, 000 deposits for 60 days is about 10 per cent, while for N10 million deposit and above the rate could be as high as 14 per cent.  “But we do not just take funds, it is subject to need. You know we channel the funds into transactions like LPOs. So we take funds if there is a transaction to be funded, and we share some of the profit with the depositors. That is why our rates are still high,” the chief executive of a finance company confirmed to Vanguard.

Deposit rates started declining across the industry from the fourth quarter of last year following increasing excess liquidity in the system coupled with credit freeze. The excess liquidity crashed inter-bank rates to below two per cent from average of 8 per cent in July.

Also as banks reduced lending to unprecedented low levels, most banks found themselves with huge depositors funds not channeled to any investment with the necessary returns to pay the interest rate on the deposits.

Consequently, banks began to slow down on deposit mobilisation occasioning a shift in emphasis on deposit target to revenue target. A bank manager in one of the rescued banks told Vanguard there is no more deposit target but target for current account, fees collection and other non interest income based transactions.

In some other banks the staffers are given lending target, which is they must give out an amount of loans to customers within a specific period. A senior banker however warned that these measures might boomerang, occasioning another wave of non-performing loans in one to two years from now.


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Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.