Flight to safety, low interest rates trigger 270% boom in commercial papers

THE quest for cheaper funds by corporate bodies and fear of non-performing loans by banks have triggered a boom in the market for Commercial Papers, CP, with the market growing by 270 percent in the third quarter of the year (2018). CPs is short-term unsecured promissory notes issued by companies.

They are basically documents that promise to repay a defined amount of money with interest after an agreed period of time, and can be bought by both individuals and institutional investors.

While they provide alternative source of funding at a cheaper cost, the procedure and conditions required to issue CPs deter most companies from the instrument and hence go for more expensive bank loans. Data from the Central Bank of Nigeria, CBN, however, revealed sharp increase in issuance of CPs in recent times.

The companies responsible for the surge in CPs flotation are Dangote Cement Plc, N150 billion; Access Bank, N100 billion; Sterling Bank, N100 billion; Flour Mills, N100 billion and Union Bank, N100 billion.

While the CBN attributed the sharp growth in CPs to “increase in investments in CPs by merchant banks”, the banks however told Financial Vanguard that the boom in CPs is driven by a combination of factors namely quest by corporates for cheaper source of loan, fear of non-performing loans among banks, and merchant banks’ quest for stable source of funding.

Vanguard, November 26, 2018

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