Stories by Chinenye Anuforo and Chinwendu Obienyi
despite the excitement that trailed the launch of Federal Government of Nigeria (FGN) Savings Bond, investors’ participation in it has not been too impressive even with its high coupon rate. This is because the amount allotted has dropped consistently from N2.07 billion in March 2017 to N400.57 million in July 2017.
According to data from FSDH Research, total number of investors in the FGN Savings Bond also dropped from 2,575 in March 2017 to 779 in July 2017.
The research firm stated that one of the factors that could be responsible for this development is the rally that dominated the equity market in Nigeria since the introduction of the bond in March 2017.
“The Nigerian Stock Exchange All Share Index (NSE ASI) appreciated by 51.47 per cent between March 1, 2017 and August 9, 2017. Many retail investors diverted funds to the equity market to take advantage of capital appreciation. Other factors are the low awareness of the benefits and characteristics of the bond, the low liquidity of the bond at the secondary market and the high yield on the Nigerian Treasury Bill (NTB),” FSDH noted.
The coupon rate on the two-year bond, which was 13.1 per cent in March 2017 stood at 13.39 per cent in July 2017 while the coupon rate on the three-year bond, which was 13.79 per cent in April, the first time a three-year bond was issued, stood at 14.39 per cent in July 2017.
Between March 2017 and July 2017, a total amount of N5.15 billion was raised through the FGN Savings Bond. The highest amount allotted so far was N2.07 billion in March 2017 while the lowest amount was N400.57 million in July 2017.
The coupon rates for the August 2017 offer are 13.535 per cent and 14.535 per cent for the two-year bond and three-year bond respectively. This means that the August bond issues carried higher coupon rates than the July issues and represent the highest coupon rates since inception.
The persistent increases in the coupon rates have not attracted enough subscription to the bond despite the steady decrease in the inflation rate in the country since January 2017.
FSDH highlighted that the following strategies can be adopted to increase investors’ participation in the FGN Savings Bonds: (i) The Debt Management Office (DMO) and stockbrokers can organise investors’ roadshows in various cities and schools across the country. This will be an avenue to directly engage retail investors on the need for them to hold the bonds in their investment portfolio. They can start with a pilot scheme in Lagos, Abuja, Port Harcourt and Kano.
(ii) The DMO can work with some identified large corporate organisations that have large number of employees to encourage their employees to invest in the bonds on a monthly basis.
(iii) The DMO can also work with government agencies to encourage civil servants to invest in the bond. We believe these strategies should be able to attract a minimum of one million subscribers on a monthly basis. If this is achieved and the monthly subscription amount increases, the overall weighted average interest rate on the FGN debt will drop.
Recall that in March 2017, the DMO, on behalf of the Federal Government, introduced the monthly FGN Savings Bond (FGN SB) as part of its efforts to promote the savings culture in Nigeria and improve financial inclusion, particularly among retail investors.
According to DMO, the retail savings bond product, which is the first of its kind will be accessible to all income groups for subscription at N5,000 per unit with a maximum subscription of N50 million and a tenure ranging from two-thre years.
•The savings bond earns you an interest that will be paid quarterly directly into your bank account.
•The savings bond is safe and is backed by the full faith and credit of the Federal Government. FGN T-Bonds hardly default, so you are nearly 100 per cent sure that you will get your money back in full along with the interest.
•You need not be rich to invest as anyone with as little as N5,000 can invest in the bond.
•FGN SB is a good way to save towards your marriage, an occasion, school, project, retirement, among others.
•You can also use the savings bond as a collateral to get a loan from a bank and/or finance house.
What are the risks?
FGN bonds are often said to be ‘risk free’ because the Federal Government hardly defaults on debt repayments especially if it is a naira denominated debt. However, being a bond, there are a few risks, should you decide to sell before maturity.
•Just like a stock, you can invest N1 million in a bond and get only N900k in principal.
•You also face the risk of losing the value of your investment to inflation. If the interest rate on the FGN Savings Bond is lower than inflation rate, then your returns are lower in real terms.