Why retail investors should embrace FGN Savings Bonds

By Chinenye Anuforo and Chinwendu Obienyi

Since the capital market crash in 2008, most investors especially those at the retail end of the market have found it difficult to return to the stock market despite the regulators (Securities and Exchange Commission, Nigerian Stock Exchange) and other stakeholders efforts to convince them.
The reason was that most of them suffered significant losses after the crash and have become very skeptical of investment in stock market.
But, recent decision of the Debt Management Office (DMO) to issue a new retail investment programme called the FGN Savings Bonds may change that equation.  According to DMO, the retail savings bond product which is the first of its kind will be made accessible to all income group for subscription at N5,000 per unit with a maximum subscription of N50 million and a tenure ranging from 2-3 years.
Speaking during the recent listing of the US $1 billion FGN Eurobond on the Nigerian Stock Exchange (NSE), Director General, DMO, Abraham Nwankwo hinted that government’s plan for the market was to democratise its activities in the bond market by making it easily accessible to most Nigerians so as to ensure continuous development of the domestic market and to bridge infrastructure deficit constraining economic growth.
He further said, “By promoting retail participation in the bond market, the goal is aimed at encouraging participation in investments and driving financial inclusion in the country will be further enhanced”
This represents an opportunity for investors to harness the huge benefits derivable from the retail bonds, but the question is do these investors really know what an FGN savings bond is? Is cash accepted? Are there returns on investment and if there is, how will it be paid or how can I benefit from the savings bond?
What is a FGN Savings Bond?
This is a retail savings product issued by the DMO on behalf of the Federal Government which is accessible to all income groups and guarantees interest payment and repayment of principal.
Can savings bonds be sold before maturity?
The bond can be traded on the floor of the Nigerian Stock Exchange through Stanbic IBTC Stockbrokers Limited or any other designated broker
What are the benefits?
•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 FG. FGN T-Bonds hardly default, so you are nearly 100% 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 savings bond is a good way to save towards your marriage, an occasion, school, project, retirement etc.
•You can also use the savings bond as a collateral to get a loan from a bank and/or finance house.
What are the risk?
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. We’ll explain this later.
•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. In a high inflationary environment like Nigeria is currently experiencing, investing in bonds can lead to a loss of value if the rates are lower than inflation.
How much can I invest?
Retail investors looking to invest in the FGN Savings Bond only need a minimum of N5,000 to invest. Subsequent investment over N5,000 will be in multiples of N1,000. Meaning that you cannot invest N5,500 or N12,700. It’s either N6,000 or N13,000 or N30,000. The maximum amount a single retail investor can invest in the FGN Bond is N50 million
Returns on your investment
The interest rate for the bond will be fixed by the DMO based on market parameters and coupon will be paid quarterly.
As regards the procedure of buying the savings bonds, investors will be required to complete and submit subscription forms and make payment to stock broking firms and a CSCS account must be opened by each investor through a stock broking firm for the lodgement of the FGN savings bond before the offer and to enable retail trading of the bonds on the floor of the NSE.
If an investor already has a CSCS account, he will be required to provide bank account details at the point of account opening for coupon payment.  While the government looks to raising fund to finance critical infrastructure projects such as power, roads and rail, projects aimed at diversifying the economy away from oil, the judicious use of funds generated will no doubt bring a positive turn-around to the economy even as experts have predicted that the economy will come out of recession. The Savings Bond will help the Federal Government mobilize domestic resources for deployment into important capital projects to reflate the economy and will be of benefit to the ordinary Nigerian.
Chief Executive Officer, Arthur Steven Asset Management Limited, Olatunde Amolegbe, said the FGN savings bonds will have an immediate multiplier effect on all the sectors in the economy and will help to reduce the negative impact of inflation.
Hear him, “The FGN savings bond is a new innovative way of economic empowerment of the populace by the government and if one is able to earn double digit return on his/her investment, it can reduce the impact of inflation on personal wealth considerably”
Expressing his own view, Executive Director, Market Operations and Technology, NSE, Ade Bajomo, said, “This will set up the foundation for multi currency capital raising and trading in domestic market, hence opening up hybrid capital raising option and creating additional portfolio diversification opportunities for investors on the NSE”
In a country where pension payment has become a thorny issue, and hundreds die waiting for gratuity or pension, the bonds offer securities for old age and for those still active, the bonds will be good products for savings towards important personal projects that salaries or monthly income cannot cover.
Executive Director, Capital Market, NSE, Haruna Jalo-Waziri, said,  “NSE Retail Bond Market was launched in 2012 with the aim of providing retail investors access to high quality debt instruments, as well as afford them portfolio diversification opportunities in an efficient and reliable way. The launch of the Federal Government National Savings Bonds is consistent with the NSE’s commitment to grow domestic investor participation in the Nigerian Capital Market.

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