An active Commercial Paper (CP) market is integral to a country's financial system. It provides companies with the opportunity to raise capital from the money market to meet short-term funding obligations cheaply, in comparison to an overdraft or revolving credit facility, both of which are prohibitively expensive; and in the absence of collateral requirement. In other words, its issuance does not create a lien or charge on the assets of the issuer. However, despite its obvious benefits, the Nigerian CP market is still relatively small due to the fact that corporations turn to bank loans or overdrafts as a preferred short term financing option.

In a country like Nigeria, where capital is scarce and interest rates are high, a CP can provide the much needed relief to a company's short term liquidity difficulties.

A CP is an unsecured short-term fixed-income debt security, which has a tenor ranging between a minimum of 15 days and a maximum of 270 days. The absence of collateral makes CPs a financing option that is only open to large established corporations with excellent credit ratings. These corporations have the option to either issue the CPs at a discount to face value or as interest-bearing. In both cases, the rates are usually cheaper than bank loans; a CP can be issued at rates varying between 10.95% and 15.25% in contrast to bank loans which typically range between 25% and 30%; sometimes even higher; rates are quoted as an average of reported rates as at June 06, 2016, in Nigeria. The reason for this disparity includes the higher costs of issuing a bank loan and CBN's tight monetary policy.

As an investment tool, a CP can help to diversify an investor's portfolio; thus reducing the overall portfolio risk. The short term nature of CPs also permits a quick return on investment, thereby allowing investors remain relatively liquid. However, participation in CP market is regulated. Guaranteed/Secured CPs may be sold to all Investors but Clean/Unsecured CPs can only be sold to Qualified Institutional Investors (QII) (these are Banks, PFAs, Insurance Companies etc.) and Eligible Individual Investors (High Net-worth Individuals).1

The instrument was first introduced in Nigeria in 1962. It was used to finance the export-marketing operations of the then Northern Marketing Board. However, by the Soludo era, the main participants in Nigeria's commercial paper market were the banks and discount houses. At its peak in 2011, the CP market was worth about N190 billion per month. However, the growth of the market was severely hampered by the flagrant abuse of the CPs by market participants. For instance, some financial institutions were found to have repackaged customers' deposits as CPs, which meant that the amount of insurance premium paid to the Nigerian Deposits Insurance Corporation at the end of the year would reduce. To curtail such activities, the Central Bank of Nigeria issued the "Guidelines on the Issuance and Treatment of Bankers' Acceptances and Commercial Paper" in 2009 but it didn't become effective until 2011.

The guidelines provided a more restrictive regulatory regime than had been obtainable before its implementation. For example, all DMBs and Discount Houses were required to report their transactions in CPs on a weekly basis to the CBN. These provisions were considered onerous by the banks. The resultant effect was a slowdown in market activity starting from 2011 when the guidelines became effective. A total of N2.39 trillion worth of CP transactions were consummated in 2011, whereas the worth of CPs recorded by the same system sharply fell to N979 billion at the end of 2012. The sharp decline was more noticeable from June 2012 when just about N2 billion worth of CP transactions were executed compared with N178.90 billion recorded in May 2012.

This was the status until it was revived in 2013, following the establishment of the FMDQ OTC securities exchange (The formal Over-The-Counter Securities Exchange). The FMDQ OTC provides a platform for the trading of fixed income securities, currencies, and derivatives, thereby creating the much needed liquidity to attract investors. The revival of the CP market has further deepened the Nigerian financial markets by providing another avenue of raising money for companies and also providing another investment product which investors can take advantage of. In contrast to the old regime where only banks participated in the CP market, the current regime has seen both financial and non-financial institutions utilise the market to raise funds – Stanbic IBTC was the first to issue their CPs worth N100bn on FMDQ in 2014; Nigerian Breweries issued CPs worth N100 billion in 2015; Guinness Nigeria issued CPs worth N10 billion in 2016 and it is expected that Skye Bank will be raising N100 billion via commercial papers before the end of the last quarter of 2016.

The recent revival by the FMDQ OTC is very much welcomed. It adds to the ever growing perception that Nigeria is now entering an era where more corporations will look to the financial markets as opposed to the banks for raising finance. There is a huge amount of funds currently held up in government bonds and T-bills which could easily be redeployed to a higher-yielding money market security such as a CP. As such Financial Officers would be very wise to look closely at this option to augment their working capital needs.


1 FMDQ Commercial Paper Quotation Rules December 2014

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