Tuesday, August 21, 2007

N1,000,000 for your Use...For real!


I have a proposition for you today, and I sincerely hope you take it serious and take advantage of it. Remember those days when it's safe for you to keep away from your Nigerian banker friends? Yes, because the moment they know you have a job, they'll come after you asking for deposits, asking you to open all kinds of accounts, and you wonder how much you are earning that 3-4 banks are solicting for your widow's mite termed "salary". So it was rather interesting for me to have someone call me about 2-weeks ago (he still hasn't let off my case!) to "market" me vigorously to collect money from his bank....

I tried to convince him I didn't need the loan, considering it was too small to finance any "grandiose" ideas I have in this small head of mine, but after much "pestering" and for good old time sake, I was willing to take this loan and put it to some use. What is this loan all about?

They termed it a quick loan up to the tune of N1,000,000 repayable over a 12 months period. No need to open any account with them, all they require is your post dated cheque covering the 12 month period. In accepting his offer for this loan, I made some considerations which I'll like to share with us.

The interest rate (p.a) for the loan is put at 17%, a one time processing fee of 1.75% and a quarterly management fee of 1.25% represents the cost associated with this loan. Typically these are the rates similar to what obtains amongst banks if you intend to collect any loan facility at the moment. However, there's some side to the loan being offered that I find interesting; loan repayment is on a "reducing balance" basis. In essence what you actually pay as interest rate over the 12 months tenor period is only 14%. Comparatively with what obtains in the market now, this rate is relatively competitive. Furthermore the fact that I dont have to open an acccount with them to qualify for the loan is a major selling point I couldn't ignore. So all I have to do is write out 12 post-dated cheques and I'm fine.

Should you go for this loan? I will say a categorical yes! Ask your self a simple question, What can I do with N1,000,000 over the next 12 months that will give me over 14% returns? for those of you who are quite entrepreneurial, that's a slam dunk question...for those who are not, don't lose hope, you can invest this money in the stock market. This loan is far much convenient than accessing a "margin loan" which is more common these days being offered by brokers or some other banks.

For those who hate the mention of the word "debt", let me give you another perspective to look at this opportunity from. If this facility is accessed and you use it to buy non-money yielding assets like a sound system, Ipod, second hand cars etc. then you may be using the facility in a very inefficient way (unless ofcourse you are sure the prices of these goods will be greater than 25% of its current price in 12 months time!). However, if the facility is used appropriately, in a best case scenario, you can have returns over 25% having the facility yielding good money for you and paying itself. In a worst case scenario, where any stocks you put the money has a short to medium term bearish run in the market, you can take solace in the fact that you played the Cashflow game properly: having access to a lump sum N1m at current time and having to dole out small payments over time would have given you good time-value for the money: and remember the investments you have are still in place, only a matter of time, the return will dwarf the cost of the loan.

I will be taking the loan, and I'll put it in some stocks I intend to hold for medium to long term. I encourage you do the same. I'm not authorised to put the name of the bank on this blog (It will be too much freebies for them), however, you can contact my friend who works with this bank and discusshe will freely share his corporate identity with you. His name is Sola Olagunju and he can be contacted on 0805 245 9019.

As the months go by, I'll give you a feedback on how well the investments I'll use the loan for performs.

Enjoy!

Note: (I hear the quick loans are only accessible to people in some selected sectors of the economy, I however encourage you still go ahead and discuss with them, if they can work from 1st principles, then they should be concerned about your ability to pay focussing only on your cash-flow for the next 12 months.)


Wednesday, August 15, 2007

Soludonomics - "Redenomination" not "Revaluation"


I have never hidden my admiration for the Governor of the Central Bank of Nigeria (CBN), Professor Charles Soludo. From his banking consolidation announcement in 2004 to the recent announcement on the "re-denomination" of the nation's currency, he has proved to be a man who understands the tough choices and decisions that running an economy requires; Soludo has proved again and again a man who can deftly combine the intricacies and not too pleasant allure of criticised "academic" economic theory with a business minded approach to making pragmatic decisions meant to move our dear country forward.


So, is this a right decision? What exactly does this portend? How does this directly affect the populace? The truth be told, there is no "right" or "wrong" policy. Every economic policy has inbuilt in it trade-offs, and the potential for success and/or flip flops. The crucial point of note in any policy is the competence and quality of the executors and the institutional capability to adequately implement the tenets of the proposed policy. If the way and manner the banking consolidation was carried out is anything to go by, I believe Soludo and his team proved their mettle in handling the economic reins of the country: in that wise, I fret not!


Whatever judgment you may wish to put on the new re-denomination policy, throw away your bias and prejudice: The man said re-denomination not revaluation! In essence, we apply our knowledge of simple arithmetic i.e. if you are currently earning N100,000 and you spend it now to buy a car costing N100,000, re-denominations says, you will now be earning N1,000, and that you will be able to buy the same car for N1,000. Let's consider the potential benefits of this new policy from two key points: 1. Inflation Management and 2. Internationalisation of the Naira for the West African/African Currency Market.

Inflation in lay man terms focuses on the prices of goods and services: how prices rise and fall and at what rate these gyrations occur. Re-denominating the naira by taking off 2 zeros, potentially can reduce the rate at which the prices of goods and services in the economy can rise(however, I put a caveat on this claim, if there's poor or inconsistent implementation of supporting policies). One potential benefit is that price movement will most likely be in small decimal prints as opposed to big jumps in "rounding-off" changes e.g. why should the price of a product jump from say N20 to N25 and not steadily to N21 to N22.50k etc. These have been basic anomalies experienced in Nigeria for as long as I can remember. these little sensitivities guide price movement in developed economies and have been a key indicator in managing inflationary trend in most developed economies.

On the issue of Internationalising the Naira, partcularly within West Africa, I believe it's a vision long overdue. I have much been appalled by the lack of clout we stride the West African economic and political landscape. It's long overdue for the Naira to take it's rightful position against the CFA Francs used commonly amongst the francophone West African nations. With a growing Foreign Reserves, which is reportedly about 70-80% of the total Foreign Reserves of West Africa, the Nigerian currency is most suited to be the currency of choice along West Africa. If we don't sit up early enough, we could miss the opportunity to be the currency of choice to be bench marked against in the sub-region. So it makes sense for the country to carry out the re-denomination policy to a successful conclusion, as we wake up from our docile position in running the show not just in West Africa, but across the larger African continent. ascribing some real value to the naira is a significant starting point in a long walk, but a potentially "win" situation for Nigeria.


Notwithstanding the various criticisms levelled against Soludo, especially with respect to how the foreign reserves of the country could have been best utilised in the last 3-4 years; my opinion is that the strategy, as I have observed so far has been to put some form of stability and predictability to key economic indicators of the exchange rate and money supply suitable for an open economy (and private sector-led) which we have chosen to operate. The shrewdness in managing the foreign reserves thus far has achieved some level of predictability (ask the formal business sector of the economy, and they'll tell you so) and as accounted for some measure of success we have achieved. If our macroeconomic objectives does change, then clearly our national strategy to managing these reserves will be tweaked accordingly.


Indeed, just like the battered frame of the Nigerian citizen, the story of "Mr. Naira" has been a symbolic reality "Mr Nigerian" has been faced with. so whether you believe in the rationality of the pronouncement by the CBN Governor, it is indeed a great psychological boost to any human being to be told he is at least "near" equal to other human beings. So we have been told that Mr. Naira would be considered as close enough as Uncle Sam's dough come August 2008 (don't ask me why it is not N1 to $1, go and read George Orwell's Animal Farm!)