CBN’s rate cut on Savings Account: What does this mean?

Recently, the Central Bank of Nigeria (CBN) ordered Deposit Money Banks (DMBs) to pay 10% of its Monetary Policy Rate (MPR) as the new minimum interest rate on savings deposit in the country. This represents a downward revision from 30% of MPR. Consequently, with MPR currently at 12.50%, the minimum interest accruable on a savings account in Nigeria is 1.25% (previously 3.75%), effective September 1st, 2020.

However, it is worthy of note that interest rates on savings account can only be earned if a customer makes less than four (4) withdrawals in a month. In the event where a customer makes more than four (4) withdrawals a month, the above interest rate on savings deposit will not be applicable.

The Apex bank’s decision to cut savings rate may not be unconnected with the current economic realities and low interest rate environment that has affected banks’ performance in the country. While this move may bode positively for banks performance in the area of net interest margin improvement and earnings performance, bank customers (especially users of savings accounts) are on the losing end of this policy.

Understandably, interest rate on savings account have been largely ignored by majority of people due to its low value, the further reduction in interest rate may cause some reactions amidst interest/return seeking bank customers. We will put this to context:

Depositing N100,000 in a savings account at the beginning of the year (without withdrawing) will amount to an interest of only N1,250 at the end of the year. Considering, the trajectory of inflation (currently 12.82%) and the likelihood of its continued rise, the N100,000 savings plus interest will be losing value in real terms. Simply put, the savings at the end of the year has lost part of its buying power. Consequently, the need to seek better interest yielding savings or investment platforms may arise amidst some bank customers.

What can an average savings account holder do to mitigate the impact of this cut in interest rate?

The next question that comes to the mind of an average savings account holder is, ‘what can I do with my savings account?’  Economists will advise such account holder to spend now rather than save for the future as long as interest rate remains below inflation rate. However, in Nigeria, with the high level of uncertainty in future income, it is advised to look for better alternatives that are close to a savings account.

What alternative investments can Investment One Offer to users of Savings Account?

While interest rates are generally low and investments with returns above current inflation rate are quite scarce, some pseudo-savings platforms still offer a superior return to the new interest rate on savings. Our Z-save plan on Ziing and Abacus Money Market Funds still provide better options for savings account holders with similar flexibility to withdraw when the need arises.