THE biting effects of slow economic growth and tighter regulation have triggered an 80 percent decline in banks’ investment in Bankers Acceptances, BAs, over the last five years. The economic melt-down experienced in the Nigerian economy began late 2014 when oil price came under pressure leading to weakened government revenue and eventual recession, and the economy is yet to fully recover five years after. Investment Bank BA is a short-term debt instrument issued by a company that is guaranteed by a commercial bank. Unlike Commercial Papers, CPs, which are not guaranteed by a bank, BAs are issued based on the credit worthiness or ability of the issuing bank to repay investors in case the issuing company fails to pay. NJ Ayuk in Billions at Play explains how energy underpins the African Dream(Opens in a new browser tab) This makes BAs less risky investment compared to CPs, and hence attracts patronage from the investing public including other commercial banks. Financial Vanguard analysis, however, revealed a steady decline in banks’ investments in BAs from December 2014 to May 2019. Central Bank of Nigeria’s second quarter 2019 economic report shows that banks’ investment in BAs fell by 80 percent to N7.27 billion as at end of May 2019 from N36.6 billion at the end of December 2014. Further analysis of investment in BAs on year to year basis revealed 22 percent decline to N28.4 billion in 2015 from N36.6 billion in 2014, 2.0 percent decline to N27.8 billion in 2016, 5.0 percent decline to N26.43 billion in 2017, and 56 percent decline to N11.57 billion in 2018. This trend continued in the first five months of 2019, hitting a five year-low of N7.27 billion as at May 31st. In contrast, investment in CPs, which recorded a similar trend between 2014 and 2017, staged a massive turn-around afterwards till May 2019. Financial Vanguard analysis of the CBN report shows that investment in CPs fell by 95 percent to N0.52 billion in December 2017 from N9.8 billion in 2014, but it rose by 6,275 percent to N33.15 billion at the end of May 2019. The contrasting performance of banks’ investment in BAs and CPs, according to analysts, reflects the impact of stringent condition imposed by the CBN on BAs and the impact of slow economic growth on businesses. They also noted that the decline will persist until a clear recovery and growth returns to the economy. Restrictions on BAs In 2009, the CBN, in an effort to curb abuse of the two categories of financial instruments, banned their use for off-balance sheet items. The apex bank, in a circular, stated: “The abuse ranges from repackaging of troubled assets into CPs/BAs for purported sale to other institutions, non-existence of underlying transactions for the CPs/BAs, and frequent rollovers beyond the allowable tenor. In addition, CPs and BAs are often used as the instrument of choice for raising liquidity in an attempt to conceal the extent of dependence on the Inter-bank market for banks funding needs. “Consequently, the sell-down of BAs and CPs as off balance-sheet instruments is hereby suspended with effect from the date of this circular. All maturing CPs and BAs are to be either fully liquidated or treated as on balance-sheet items.” Balancesheet items In addition to the above, the CBN introduced guidelines aimed at ensuring uniform practice and correct treatment of BAs and CPs by banks and discount houses. A major highlight of the guidelines was the restriction of BAs to trade related transactions as well as ban on use of BAs to finance service related transactions. The guidelines stated: “Every BA shall have an underlying trade transaction for which the bank should hold the title documents to the merchandise as collateral for the acceptance. These documents shall be available for Examiners’ scrutiny. “Unless otherwise specifically provided for in these Guidelines or approved by the CBN, the “sale” or “purchase” of services shall not be eligible for BA financing.” Analysts’ comments These restrictions, according to Ada Ufomadu, Senior Analyst, Financial Institutions Ratings, Agusto & Co, are responsible for the persistent decline in banks’ investment in BAs.
Investment in Bankers Acceptances nosedives by 80%
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