…Banks may resort to Commercial Paper to offset high interest expense
By ETIM ETIM
The decision of Access Bank to issue a N400 billion Commercial Paper (CP) to raise short-term working capital in spite of its enormous deposit base is strictly borne of out of the need to manage its huge balance sheet to optimize earnings and minimize loss due to interest expense on its deposit liabilities, according to financial analyst Chika Mbonu. Speaking on Arise News, Mbonu says with huge interest expense paid on deposit liabilities, CP is a better way of raising short term working capital for credible clients as it attracts far lower interest rate (discount rate or coupon rate) than deposit liabilities. CP is routinely used in the banking industry to raise funds, and it’s a common money market instrument in the UK and the US. But no Nigerian bank has issued CP in the last five years, and this explains why the Access issuance has raised eyebrows and sparked mixed reactions. A lot of people are wondering why the bank is issuing CPs to fund its working capital instead of deploying its huge deposit liabilities; while others are querying why the bank is not making use of the CBN’s Standing Lending Facility (SLF) .
Ojike says efficient and creative banks must manage their balance sheets to optimize returns and profitability. With the economy buffeted with high inflation, deposit rates have averaged 18% for some time now; and with Cash Reserve Ratio (CRR) at 50%, it means half of a bank’s deposit liabilities are sterilized and cannot be used to create risk assets. This means the effective interest rate paid on deposit by banks is 36%. This is far higher than 21% paid on CP. And what’s more? CP is not subject to CRR. Some other commentators have queried why Access Bank is not taking money from the CBN Standing Lending Facility (SLF) which enables banks to borrow from the CBN. Again, rate is the problem. SLF offers far higher rate – at 27.5% plus 5% penalty – than CP’s 21%.
‘’Access Bank is simply being creative by issuing a commercial paper at this moment, and I think other banks would be going this way very soon. Don’t forget that Access was the first to issue green bond and alternative tier one capital some years ago before other banks rushed in. I will therefore not be surprised if other banks rushed in and issue CPs soon’’, says Ojike who was a chief executive of a bank in the 1990s.
Commercial Paper is a money-market security issued by large corporations to obtain funds to meet short-term debt obligations (for example, payroll) and is backed only by an issuing bank or company promise to pay the face amount on the maturity date specified on the note. Since it is not backed by a collateral, only credible firms are able to sell their CP at a reasonable price.
