New Lease of Life for Commercial Paper Market




Globally, the private sector is critical to economic growth and poverty reduction in any economy.

It is the engine of growth for any economy as successful businesses create jobs and pay the taxes which in turn enables governments to carry out its developmental role.

However, in Nigeria, the flow of banking sector credit to this critical segment of the economy has continued to dwindle.

In fact, figures from the Central Bank of Nigeria (CBN) showed that credit to the private sector fell in May 2018, to N22.207 trillion year-on-year as against the N22.254 trillion it was in April.

The CBN report had shown that industry gross credit recorded a 3.63 per cent decrease in April 2018, the lowest since January 2017.

Therefore, desirous of ensuring that it boost lending to the real sector of the economy, the CBN at the end of its Tuesday’s monetary policy committee (MPC) meeting, announced incentives to encourage commercial banks lend to sector.

CBN Governor, Mr. Godwin Emefiele, also said the new approach, which would be tied to the Cash Reserve Ratio (CRR) mechanism.

According to him, lending to the real sector had declined in recent times, prompting an innovative approach to encourage banks boost credit to the sector.

He disclosed that the new arrangement that would make loans available at single digit with a minimum tenor of seven years and two years moratorium was considered.

He said: “The first approach, where we said, in order to achieve the objective of lowering interest rate particularly to those priority sectors– manufacturing sector, agric sector– that we will encourage large corporates to issue commercial papers (CPs) to the market and there will be a memorandum that will detail explanations of what they are going to do with that money.

“In order to complement the effort of the banks, we will expect that these CPs will come at low rate at single-digit of nine per cent or below that, and for long tenor at a period of seven years with a specific purpose for that loan.

“If the central bank sees those kinds of notes in the market, we will complement the effort of the banks through a mechanism to support that bank that lends to that corporate at single digit rate.

“It is not meant to bring competition in the money deposit banks; it is meant to complement their efforts. The most important thing is that we want to see to it that we achieve a single digit rate.”

The second approach, he disclosed, works in such a way that any bank that lends money for new projects and planned expansion that are verifiable (not refinancing), for seven years (inclusive of two years moratorium) at nine per cent interest rate, would compel the CBN to go into that bank’s CRR and release equivalent of that financing from its CRR at zero kobo spread.

Emefiele said: “We feel this is novel; it is something that we should give a chance. In the past, we had reduced CRR and released liquidity into the market, but the liquidity was not channelled properly to the high impact corporations – we mean employment-generating sectors or output-improving sectors of the economy.

“So, we decided we should approach it through this note. We believe this will work because rather than the banks keeping the money in the reserves, they can key into this and promote these transactions as long as they meet the terms and conditions.

“More details on this will be provided soon for the banks and everybody to know.”

The development is expected to strengthen activities on the Commercial Paper segment of the market, where transactions had risen to N1.06 trillion from zero level in 2013.

The FMDQ OTC Securities Exchange has done a lot in reviving the CP market.

CPs are unsecured promissory notes with a fixed maturity of less than one year, issued by companies to raise money to meet short term finance obligations. The notes are backed by the promise of the issuers to repay based on certain agreed terms.

Since 2017, several companies which included Rand Merchant Bank, FSDH Merchant Bank and recently, Dangote Cement and Stanbic IBTC, have issued commercial paper.

To analysts, following banks’ reluctance to lend, CPs have become an increasingly attractive source of funding for corporates with short-term obligations to meet.

CP issuance isn’t for everyone, but corporates with the right credentials could do worse than to sell short-dated paper, a report by Treasury Today stated.

“The issuance of CP has to be put within the context of a mix of funding options that are available to corporates. Short-term funding is traditionally cheaper than long-term funding. In addition to size you also need credit quality,” the report quoted Managing Director of Capital Market Daily, Pieter van Dyck, to have said.

Moreover, corporates with active CP programmes are often better able to negotiate with their banks and can take advantage of the arbitrage opportunities available, Dyck added.

“It is true corporates with CP programmes are able to negotiate better deals with their banks – which in turn drives down the weighted average cost of funds. This is probably the most important reason why corporates issue CP.”

Also, analysts at Afrinvest Securities Limited, noted that the decision to encourage large corporates to issue commercial papers which the central bank would buy, “is a form of Quantitative Easing (QE) in advanced markets, a last-ditch effort to boost growth after the 2009 global recession which recorded mixed impact.”

Afrinvest added, “We believe this is an unlikely avenue for growth in Nigeria, given a largely informal economy which would not benefit directly from the proposed stimulus, probably targeted at large corporates (prime borrowers), and multiple structural factors that currently inhibit credit transmission. “

Commenting also on the proposal to reduce CRR for banks that direct long-term credit at nine per cent, with seven years tenor and two years moratorium, to critical sectors such as manufacturing and agriculture, Afrinvest stated, “We believe banks will not bite as long as structural barriers to accessing credit – such as lack of credit histories, lack of a collateral registry and poor competitiveness and productivity – are not addressed. Indeed, in November 2015, the MPC attempted the selective CRR reduction to mild reception and success.

“As we have noted in our prior reports, the key to unlocking strong and sustained growth lies in resolving the challenges that hinder productivity and competitiveness in Nigeria. While the MPC retained all policy rates and stayed the course as we anticipated, there were welcome surprises.

“We observed increased leaning towards a hawkish sentiment as three members voted for a rate hike, up from a member in the May meeting. Generally, risks of foreign capital flows reversal arising from increasing US treasury yields and near-term risk factors to inflation continue to influence the decision making of committee members.

“We expect market reaction to the MPC decision to be neutral, in part, because this has been priced in, and mainly due to the extended disharmony between current market yields and the MPR. The CBN has abandoned rate setting through the MPR in favour of its money market operations which are more indicative of its intentions, and we expect this to continue for the rest of the year.

“Equities continue to suffer from foreign capital outflows and in the absence of a positive trigger in the domestic market, we expect investors to continue to trade cautiously. Political risk and uncertainties ahead of the 2019 General Election are factors that could worsen foreign capital flight,” it added.

Similarly, an analyst at Ecobank Nigeria, Mr. Kunle Ezun, who welcomed the initiative by the MPC, said the move would support the growth of the Nigerian economy.

“The idea is that for you to drive growth, you need the banks to lend. Most of the banks today are exposed to foreign currency loans and as such they have huge non-performing loans that is constraining them to give out credit to corporates.

“So, the idea is to encourage corporates not only to get liquidity, but get it at a very cheap rate. Today, a lot of the corporates are not comfortable with the rates at which the commercial banks give out their loans. That is where the CBN comes in to bridge the gap.

“Most importantly, what the Commercial Paper would do for a lot of corporates is to provide access to fund for expansion,” he said.

On his part, the chief executive of Nova Merchant Bank Limited, Mr. Chinedu Ikwudinma, who welcomed the move by the CBN, explained that, “commercial paper offers corporates a wider pool of funding.”

To analysts at Cowry Asset Management Limited, the proposed special interventions by CBN to directly buy CPs issued by corporates and its encouragement of the deposit money banks to do same via a differentiated dynamic cash reserves requirement regime, would be a catalyst for the much-needed economic growth.

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