In the face of surging inflation, Nigeria’s financial landscape is favoring the wealthy over low-income earners, according to analysts. The National Bureau of Statistics’ recent data reveals a 27.33% Year on Year inflation rate for October 2023, the highest in 18 years, prompting the Central Bank of Nigeria (CBN) to implement inflation-targeting measures.
As interest rates steadily rise in the money market, high net worth individuals (HNIs) and large corporations are capitalizing on investment opportunities, particularly in fixed-income markets and equities. Fixed deposit rates have reached record highs, averaging 15% in the third quarter, with fixed income securities trending at 17%.
Despite the potential risks, HNIs and big businesses benefit from higher interest rates on deposits while enjoying lower rates on loans and virtually unlimited access to credit. In contrast, low-income earners face rising inflation, diminishing purchasing power, and limited access to loans, often burdened with higher lending rates.
Economists warn of a growing threat of increased poverty as financial returns soar, perpetuating a cycle of the rich getting richer and the poor getting poorer. Analysts offer insights into the reasons behind this disparity.
Insights from Analysts:
1. Financial System Favors the Rich
David Adonri, Analyst and Vice Executive Chairman at Highcap Securities Limited, explains that the unregulated pricing of services in the money market, coupled with the longer maturity profile of fixed deposits, contributes to higher interest rates for HNIs. The lower risk associated with prime depositors makes them more attractive to banks.
2. Negotiating Power Plays a Role
Tajudeen Olayinka, CEO of Wyoming Capital & Partners Limited, attributes the treatment disparity to the negotiating power of high net worth individuals. Their ability to align with banks’ liquidity management strategies and the reliability of longer tenors for fixed deposits make them preferable clients.
3. Inflation and CBN Strategy Impact Yields
Afrinvest West Africa analysts highlight the impact of rising inflation on yields in the fixed-income market. With the expectation of continued inflation, they predict sustained yield upticks, favoring larger players in the financial markets.
4. Future Predictions: Sustaining the Disparity
WTI Financial Services analysts foresee the CBN maintaining a tightening stance in response to inflation. Higher interest rates may lead to a bearish trend in the equities market as investors reallocate funds to capture higher yields in the fixed income market.
As Nigeria grapples with economic challenges, the widening financial gap raises concerns about the long-term implications for the nation’s socio-economic fabric.