Why Nigeria’s current financial system favours the rich against the poor - Analysts

At the backdrop of the surging inflation, financial market’s response has indicated that low income earners are now at the receiving end while high networth individuals (HNIs) and big corporate organizations are reaping the benefits in investment income.

Recall that the National Bureau of Statistics, NBS, this week’s figures on inflation shows 27.33 percent Year on Year (YoY) for the month of October 2023, the 10th consecutive monthly rise and also the highest inflation rate in 18 years.

The Central Bank of Nigeria, CBN, in response to the development since this year, had triggered off its inflation targeting monetary policy strategy which includes raising Monetary Policy Rate (MPR).

Consequently interest rates have been on steady rise in the money market while liquidity remained high also.

Vanguard findings however, revealed that the HNIs and highly liquid corporate organizations have been cashing-in on the development to invest huge resources in financial assets especially in fixed income market as well as equities, raking huge returns since this year.

Fixed deposit rates have gone up on record highs averaging at 15 percent in the third quarter of this year while many fixed income securities are trending at 17 percent.

These are coming at the backdrop of CBN’s high MPR rate which hit 18.75 percent in the third quarter with likelihood of further rise in the next Monetary Policy Committee, MPC, meeting scheduled for next week.

Also returns on equity investments as at third quarter is on record high of 35 percent, one of the best worldwide, a development which appears strange because a rising fixed income returns usually leads to a declining return in equities.

But the low income earners have been constrained by the rising inflation which sapped their purchasing power and hindered their ability to save or invest.

Vanguard findings also show that while the HNIs and big businesses get higher interest rate on their huge cash deposits they also get lowest interest rate on loans and almost unlimited access to credit.

But on the other hand, low income earners and small businesses get low interest rate on their little savings and in some cases the interest is wiped out into negative by bank charges.

Moreover, they have little or no access to loans and the ones that could have some loan considerations are burdened with lending rates far higher than the prime rate the HNIs and big businesses get.

Consequently, economists warn about looming danger of escalating poverty amidst huge financial returns in the economy, with the institutionalization of the poor getting poorer while the rich get richer syndrome.

However, analysts who spoke to Vanguard explained the situation, giving diverse reasons why the situation emerged and is likely to remain or even worsen in the near future.

Financial system is safer with the rich

Reacting to the disparity in money market skewed against low income earners, David Adonri, Analyst and Vice Executive Chairman at Highcap Securities Limited said: “Intermediators in the financial services industry aim at maximization of income and minimization of costs or risks. Except in the capital market where commission charges are statutorily regulated, pricing of services in the money market are unregulated.

"Usually, demand deposits (current and savings) are quite volatile and attract low interests but the rates on fixed deposits are much higher because of their longer maturity profile.

‘‘Fixed deposits give banks more profit as they can be used to create less risky assets by the banks. The higher rate on fixed deposit serves as incentive to depositors to move their funds there.

‘‘Risk and return underlies the charging of lower rate to prime depositors.’’

On the credit side, he maintained that the banks are safer with prime customers who are the HNIs and big corporate.

He stated: "The propensity for credits to prime customers to go delinquent is much lower compared to the higher risk inherent in MSME (Micro, Small and Medium Enterprises) lending.

"To compensate for this higher risks, lenders charge additional risk premium.

“Interest rate and fees charged by Money Market intermediaries were deregulated several years ago. They are now market driven.”