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Options before depositors after CBN slashes yields on savings

By on September 2, 2020 0 149 Views

By Oludare Mayowa

The Central Bank of Nigeria (CBN) on Tuesday announced a new interest rate payable on savings deposits by banks to their customers, which ultimately pushed the yield on savings downward to effective 1.25 percent from September 1.

The move by the CBN was to reflect the going rate in the money market, which has shown that yields on all viable fixed assets, especially Treasury Bills have crashed to around 2.12 percent this week on the secondary market.

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The new CBN directive to banks which stipulate that interest rate payable on savings deposits shall be a minimum of 10 percent per annum of Monetary Policy Rate (MPR) effectively translates to 1.25 percent as the ongoing MPR as of the last monetary policy committee (MPC) meeting was 12.5 percent.

The details of the CBN circular announcing the change in interest payable on savings deposit with banks:

“The Central Bank of Nigeria (CBN) has noted with satisfaction the recent declining trend in market rate in the banking sector following the implementation of policies aimed amongst others, at stimulating credit flow to the real sector.

“In line with recent market developments, the Bank has reviewed the minimum interest payable on savings deposits as provided in its Guide to Charges by Banks, Other Financial and Non-Bank Financial Institution issued in December 2019.

“Consequently, all deposit money banks are hereby informed that effective September 1, 2020 interest on local currency savings deposits shall be negotiable subject to a minimum of 10% per annum of Monetary Policy Rate.

In calculating the interest yield on savings deposits, banks are expected to do 10 percent of 12.5 percent, which means unless there is a negotiation for a higher interest rate, banks will be paying their customers 1.25 percent on their balance as of the 15 of every month.
Though, the policy was meant to set a benchmark for banks in dealings with their customers as many banks currently pay less than the 1.25 percent on savings; the yield on deposits will definitely discourage savings culture in the medium to long term.

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Currently, the inflation rate stands at 12.8 percent, which also means that depositors are earning negative interest yield on their savings.
For a depositor to earn a positive yield on its savings, banks should at least pay above the prevailing inflation rate in the economy.

However, when put in proper perspective, such demand for higher interest yield on deposits may not be practicable considering the fact that asides the lending rate which is effective at an average 16-20 percent in the money market, all other channels of investment are yielding below the CBN benchmark interest rate of 12.5 percent.

Also, putting into consideration, other variables, banks may not be able to compensate their depositors with positive interest yield on their money.

But the choice before depositors is to engage their accounts managers to negotiate for a slightly higher yield on their deposit to reduce the loss in value of their deposits.

Other choices before depositors are for them to explore the commercial paper market where yields are currently between 9.10 percent for 1-year tenor paper. Many companies are exploring the commercial paper option to raise needed funds to boost their working capital and inject fresh funds into their operations.

Depositors could also explore such an opportunity to increase value for their idle funds under the prevailing circumstance, otherwise, they will be eroding the value of their money as they keep their funds idle in banks vaults with low interest.

The other option left for them is to hedge their loss with storing their funds in foreign exchange such as dollars and Pound Sterling to preserve the value of the money due to the regime of low-interest rate.

Right now, many people who put their money in savings deposit without engaging such money in investment may at the end of the year have themselves to blame due to the gross erosion of value because of the depreciation of the naira against other currencies, apart from the rising inflation rate, which has been projected to rise further in the months ahead.#GFD

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