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.


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.

The recent rise in stock prices is also attributed to this interest rates crash as some moved money into the stock market.

Sad how Sanusi's ill thought out policies continue to damage the economy.
Banks are calling up customers to take out their fixed deposits and find other ways to save them as they no longer have use for them.
If they can't lend, then they can't pay interest on fix deposits.

Cry thy beloved country

the mighty are falling

must be the rich money bag or politician Nigerians.

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

how many nigerians can do this? The ones selling tomatoes and garri?

or funny how a journalist with a clearly bias agenda against sanusi can blame the phenomia of nigerians moving their money out of nigeria that has been happening since independence on Sanusi.

more uncited figures and exaggerated numbers

tpia.:

must be the rich money bag or politician Nigerians.
how many nigerians can do this? The ones selling tomatoes and garri?

In any economy, there's always a connection between the billionaires, the millionaires, and of course the thousandnaires. What ever affects one level will eventually affect the others.

^^ the thread title is misleading.

How many Nigerians exactly are moving to Ghana, which btw isnt that big.

^i know.
nigerians have been moving their money 'en masse' all over the world since 1967.
'6 billion' which would be more then 20% of Ghana's economy? yea right. (mind you 6 billion woulnd't dent nigeria's economy)
The writer has an agenda against Sanusi and the believers have an agenda against nigeria.

I pity the Nigerian economy. What were people thinking when they put a person like Sanusi in such a position. The man is so bush that he is lost in the sophisticated World of high finance, unfortunately the Nigerian economy is getting lost with him.

tpia.:

^^ the thread title is misleading.
How many Nigerians exactly are moving to Ghana, which btw isnt that big.

To the extent that it sounded like Nigerians lined up across the board and are shuttling cash into Ghana, I would say yes, but whether other West African countries maybe draining our economy because of adverse local condition of mismangement, I would say that the title is correct.
Nigerians troop to Ghana and Benin Republic to buy cars or clear shipped items when shipping and clearing into Nigeria was made difficult or impossible by local adverse conditions. So, I wouldn't be surprised that Nigerians both local and international would move their money to a more favorable environment.
At the end of the day, people "vote their pocket books" I love Nigeria, but if I have $1000 to invest in a government bond for example, why should I invest it in Nigeria at 3% when I can get 17% across the boundary.
Instead of castigating the poster, I wish someone will present an opposing set of data to show why it's not better to invest in other countries than at home.

Uhhm. . . lets see. . . . a lot of British investors are now putting their money in Ghana cos Ghanaian interest rates are 14% as opposed to 0.5% obtainable in Britain. . . how does that sound to you?


I quote:

The banking industry on the whole suffered a total of N95 billion declines in deposit in March alone prompting the Central Bank of Nigeria, CBN, to return N951 million cash reserve requirement, CRR, credit to banks last week.

This contrasts with the N130 billion increase in deposit and N1.3 billion CRR debit experienced by the industry in February.


http://allafrica.com/stories/201004050727.html


So deposits gained N130bn in February, and lost N95bn in March. . . kini big deal?

The interest rate was slashed to 6% since July last year. . . is this a sequential reaction to an event that occured 9 months ago as painted by the article?

This is just a case of institutional investors taking advantage of arbitrage opportunities in Ghana.

Perhaps the OP should read about the concept of Hot Money and Hot Money Deposits before giving us his unsolicited economic views.

Another sensationalised piece of rubbish.

No country serious about engendering business is keeping double-digit interest rates. The OP should have read Ghanaian business complaints about high cost of borrowing in Ghana before yarning anyhow. Any money running to Ghana is not being used to build the economy, simply to play casino and reap quick returns. When such hot money is withdrawn from Ghana, they will be back to square one, just like Nigeria was after foreign capital flight in late 2008/early 2009.


What do we want to do in Nigeria. . . encourage sound economics or play financial casino?

^^^^^^
You red herring is smelling so badl, so strong that the lead hound has been led off track, but don't worry some people are still able to see beyond all your confusion and very unrelated bad examples in this arguement.

First, why compare Britain with Nigeria? You should compare Britain with France and Germany, then comapre us with the good old Ghana.

All of a sudden you have become religious and almost preachy about spending money on gambling, as if you're sure all the new capital being raised in Ghana is actually going into casinos 100%.

Even if it's true, very soon bus loads and bus loads of Nigerians will begin heading to Ghana to "win" millions and millions of cedis, and Ghana will soon become the new destination of Nigerian trying to get away from the drudgery of everyday life. Don't forget that when people gamble, they eat, drink, use the hotels, etc; the point is that more jobs will be created across the boarder than inside Nigeria with our own capital being taken to Ghana. Examples of casino based economies of Las Vegas, etc show that no matter how fast you return the capital, there is always a lasting effect on the ground, namely building, roads, etc.

Don't we need those things here in Nigeria, or won't our sharia philosophy allow its application in the interest of the economy

^^^Stop your incoherent babbling. Move over and let someone more knowledgeable make economic arguments, cos you reek of sciolism.

A sciolist like yourself who couldnt even bother to compare Ghana and Nigerian inflation rate and money-supply data before deciding whether we should be setting similar MPR with them is not worth discussing with.

Like Ibime said, the flight of capital for arbitrage opportunities is not what should
be worrying us.

What is more worrying is the reluctance of banks to lend.

^^^^
And why are the banks not lending

i'm with ibime on this one. . .my money goes where there's the most profit, this didn't start with sanusi, this started when the foreign companies started moving their money from the NSE. . .nigeria simply stopped being the goose that lays the golden egg!

naijaking1:

^^^^
And why are the banks not lending

I think JM Keynes is the authority on this one. . . .

Animal spirits he called them. Markets often vacillate between
periods of great exuberance and irrational restraint even though
on hindsight, such behaviours were wrong.

I guess you can say the climate is in need of thawing, all that loan
chasing and bank chief hounding might have been overdone a bit.

But the reasons for the capital flight to Ghana seem clear enough
and I don't think it has to do with Sanusi.

doyin13:

I think JM Keynes is the authority on this one. . . .

Animal spirits he called them. Markets often vacillate between
periods of great exuberance and irrational restraint even though
on hindsight, such behaviours were wrong.

I guess you can say the climate is in need of thawing, all that loan
chasing and bank chief hounding might have been overdone a bit.

But the reasons for the capital flight to Ghana seem clear enough
and I don't think it has to do with Sanusi.

In this World there 2 types of people: those that speak the truth, are objective, and even academical vs. those that play to the gallery. Any attempt to do both at the same time becomes what they call "speaking from both sides of your mouth"

Just don't understand how you could say that loan chasing and bank chief hounding might have been overdone on one hand, and then turn around to pontificate that it had nothing to do with Sanusi
Did I miss something here?

Well the article seems to point to the interest rate differential
as reason for the capital flight.

Sanusi's hounding and chasing has no connection with low interest
rates in Nigeria.

^^^
The jury is till out on this one.