HIGH networth Nigerians now prefer to save their cash in dollars, a report has shown.
The Coronation Research in a survey discovered that dollar deposits constitute 40 per cent of banking sector deposits.
Many investment banks are floating dollar funds, giving depositors and savers opportunity to hedge against naira depreciation.
Head of Research at Coronation Asset Management, Guy Czartoryski, said review of deposits in top 10 banks showed that 40 per cent of customers’ total savings, current and term deposits accounts are in dollars.
He said the financial sector has also seen a rise in the number of customers liquidating their savings deposits, and moving the funds to Mutual Funds, where interest are higher.
Speaking at the virtual launch of the Coronation Research: The Shifting Appetite of the Nigerian Investor: From Savings to Mutual Funds, he said movement of deposits to Mutual Funds increased after the last Monetary Policy Committee (MPC) meeting which reduced the Policy Rate to 11.5 per cent from 12.5 per cent.
“We are leaving behind a period when interest rates were so high that bank deposits provided the default for Nigerians’ savings. Over the period of 2010 to 2019, T-bills rates generally were 2.57 percentage points above inflation. This is no longer the case. As interest rates have come down savers have been turning to mutual funds to manage and protect their money,” he said.
The impact of the rate cut is already being felt on the savings deposit rate, which the Central Bank of Nigeria (CBN’s) recently capped at a minimum of 10 per cent of the MPC from 30 per cent . This indicates a reduction on interest rate on savings deposit to 1.15 per cent from 1.25 per cent to support the profitability of commercial banks under a reduced cost of funds.
Explaining the conditions behind this growth, Czartoryski said the total Assets Under Management (AUM) of Nigeria’s mutual funds (also known as Collective Investments Schemes) rose by 305 per cent in the period between 2015 and 2019, more than doubling in inflation-adjusted terms.
As commercial banks progressively offered lower rates on savings accounts, “more money switches to Mutual Funds. And the introduction of tech-based savings platforms introduces a new generation of young savers to Mutual Funds,” he said.
He explained that the AUM of the fund management industry stood at N1.3 trillion ($3.4 billion), comprising money market funds, (61.4 per cent Fixed Income funds (16.6 per cent); U.S. dollar bonds funds, 10.4 per cent; Infrastructure fund (one fund) (4.4 per cent); Real Estate funds (3.2 per cent); Mixed funds (i.e. money market plus fixed income plus equity) (1.9 per cent); Exchange Trade funds (1.0 per cent); Equity funds (0.8 per cent); Ethical funds (0.3 per cent).
He said: “People are getting better returns from mutual funds, but they also face higher risks. But if you are now saving with banks because of low interest rates, then move to mutual funds”.
According to him, mutual funds are growing rapidly and are quickly becoming the default destination for Nigerians’ savings. “Just as the Pension Funds began to take off a decade ago, now mutual funds are growing fast. The total value of Money Market funds rose 11 per cent and fixed income funds rose by 59 per cent in the first half of this year. Mutual funds are set to become a large part of the savings industry. In a few years they may rival Nigeria’s Pension Funds in size,” he said.
“The mutual fund industry in Nigeria faces two challenges. The first is risk management. The era of high returns from Nigerian Treasury Bills ended in 2019. Today, investors need to invest in a variety of other asset classes in order to obtain a reasonable return, without becoming totally exposed to any one asset class.
“That means that investment management is more complex and more necessary than before.
“Second, there needs to be more information on fund performance in order to facilitate fund selection by investors and professional advisers.
Czartoryski said in order to grow, the industry needs a new level of risk management. “Investment risk is rising as yields fall, and fund managers and investors need to master risk management and learn the benefits of diversifying their investments across asset classes,” he explained.
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