Money Market Indicators, Pension Funds, and Real Estate Finance in Nigeria by Ayotunde Olawande oni

3.0 The Nigerian Economy and Pension Fund Administration: An Experiential Overview

According to Alithea Capital Investment (2011), Nigeria achieved economic stability and growth in second half of 2010, with increased growth in the oil and non-oil sectors. Growth was attributed to increases in activities of the wholesale and retail trade sector and the Federal Government’s amnesty development programme for the Niger Delta, which fostered investment in the oil sector. Gross Domestic Product grew to 7.41% compared to 6.7% in 2009 while inflation remained at an average of 12% throughout the year; and Foreign Direct Investment (FDI) fell by 60% from US$6 billion in 2009 to $2.3 billion in 2010. However, activities on both the demand and the supply side in the real estate sector came to a standstill. The overall growth of the sector stood at 10.48% in the second quarter of 2010 compared to 10.46% in the corresponding quarter of 2009 with marginal growth achieved as a result of activities in the low end of the market, characterised by small commercial and residential developments. There was limited bank lending to major developers and investors, thereby stalling large scale high-end commercial and residential developments. For instance, in the high-end residential locations of Lagos (for example, Ikoyi and Banana Island), property values fell by as much as 40% and by up to 20% in the emerging middle income areas of Lekki. Property owners are presently willing to accept advance rent for one to two years compared with three years demanded in dollar amount during the property boom. The value of properties in the regeneration neighbourhoods of the city continued to appreciate and increased by almost 10% by end of 2009. In the third quarter of 2010, the Federal Government of Nigeria embarked on several initiatives to encourage economic performance and improve investor confidence through the restructuring of the Nigerian Stock Exchange (NSE), enhancement of the quality financial institutions to restore depositors and investors’ confidence in the financial system. Presently, credit flow for real estate developments has remained limited and new construction and infrastructure projects are almost non-existent. Malize (2011) identified some challenges facing the economy to include those fostered by the global economic meltdown that left capital markets impaired, in addition to crash in oil prices, the Niger Delta conflict, the fall of the exchange rate and stock market, which have all negatively impacted the real estate sector. Apart from these, the crisis in the banking sector in respect of which the Central Bank of Nigeria (CBN) injected N620 billion (USD 4 billion) in loans and support into nine banks and sacked eight executives for the aggregate non performing loans that present further challenges for the real estate sector. The recently concluded audit on the banks revealed the magnitude of banks exposure on non-performing loans and has presented a clear picture on the companies’ balance sheets. Nine banks were identified as showing weakness in terms of risk management and corporate governance; they provided over 60 percent of total sector borrowing, were undercapitalized and had excessive high level of non performing loans, poor corporate governance practices, tax administration processes and absence of non adherence to the bank’s credit risk management practices. However, with exposure to the capital market, the real estate segment was proven to be high risk relative to other sectors in the economy. For instance, Nigerian banks have over 700 billion Naira (USD 5 billion) trapped in the real estate sector following the boom period of the last few years. The records of Nigerian Stock Exchange (NSE) indicated that out of the N1 trillion (USD 7.1 billion) margin loans granted by banks, only N300 billion (USD 2.1 billion) were in the hand of stockbrokers, the remaining N700 billion were advanced to real estate investors and speculators. Consequently, Banks could no longer advance more credit to housing speculators to complete their venture, leading to the abandonment of projects. The consequence is limited bank financing to purchase properties as investors’ confidence is eroded. Also, the market experienced slump in demand at the high-end and yield dropping because investors with loan exposures on real estate investments were being forced to sell. Banks are no longer in the lending mode but to recover outstanding debt as a result of real estate financing that is being squeezed further due to limited purchasing power. It has become very difficult for investors to service bank loans, thereby causing serious liquidity crisis for the banks and instability in the market. The overall effect is that banks are not eager to finance new projects, leading to excessive appreciations in property valuations in the region of 100 to 300 per cent. Similarly, demand-driven factors usually at play in the open market have become ineffective as liquidity in the market arena dried up and purchasing power of investors to downward trend with less money in circulation. Few banks that are lending are charging upward 19 to 26 per cent. According to African Economic Outlook (2011), Nigeria is making progress with economic reforms that deliver strong economic fundamentals through prudent macroeconomic policies, and strengthening of the financial institutions and transformation of the economy structurally, albeit slowly and unevenly. The reform effort, aided by revenue from high oil prices, has led to significantly improved macroeconomic outcomes, including weaker inflation and strong GDP growth. Real GDP growth rose from 7.0% in 2009 to an estimated 8.1% in 2010. The robust growth in 2010, in the aftermath of the global financial and economic crisis, underscored the resilience of the Nigerian economy and to some extent, the prudence of its economic policies. Medium-term prospects are also bright, with real GDP growth projected to remain strong and stable at 6.9% in 2011 and 6.7% in 2012.

The pension industry operated in an improved macroeconomic environment in year 2010 with a real Gross Domestic Product (GDP) growth of 7.8 percent as against the 5-year average of 6.3 percent between 2005 and 2009. It was a marked improvement over the growth rate of 6.96 percent recorded in 2009. There was general improvement in economic activities during the year under review and that mainly explained the improved performance recorded in the pension industry. Inflation also decelerated as the year-on-year inflation rate dropped from 12.4 percent in 2009 to 11.8% in year 2010 with further fall in the inflation rate expected to enhance the purchasing power of retirees, and hence their standard of living.

The Nigerian Stock Market equally showed improved performance in year 2010 compared with 2009 performance as revealed by significant improvements in some stock market indicators. The All Share Index (ASI) increased by 18.93 percent from 20,827.14 as at the end of December, 2009 to 24,770.52 as at the end of December, 2010. Similarly, the market capitalization recorded a growth rate of 58.83 percent from N4.98 trillion as at 31 December, 2009 to N7.91 trillion by the end of December, 2010. However, the month-on-month performance of the stock market in terms of ASI and market capitalization was mixed. For example, the ASI recorded positive growth for seven months of the year (January, February, March, April, July, October and December), while it recorded losses in May, June, August, September and November 2010. The market capitalization witnessed the same trend in the 12-month period, while trading activities on the floor of the Nigerian Stock Exchange (NSE) witnessed improved performance as 91.96 billion shares worth N797.93 billion were traded in 1,893,807 deals in 2010, compared with 101.33 billion worth N675.12 in 1,709,002 deals in 2009. This represents a decline of 9.24 percent in terms of volume, 18.19 percent appreciation in value and 10.81 percent increase in the number of deals in the comparable years. The low deposit rates and yields on government securities had necessitated a reallocation of funds and shifts of investments away from the money market in favour of the stock market.

In respect of the money market, there was high liquidity following injection of about N3, 268.31 billion monthly statutory allocation, withdrawal from the excess crude oil account, and through payments for matured government securities. There was also the extension of the Central Bank of Nigeria (CBN) guarantee of interbank placements which ensured that activities in the interbank market remained active in the year and the relative stability in the foreign exchange market. The consequence of the improved liquidity included, among other things, drops in the interbank rates across tenors, drop in deposits interest rates across tenors, and high over-subscription in government securities leading to low interest rates and yields on these instruments. A cursory look at the 7-day interbank offer rate showed that the rate closed at 9.67 percent in 2010 as against 6.92 percent recorded in 2009. Similarly, the 90-day interbank offer rate closed at 12.17 percent in 2010 as against 15.29 percent that obtained in 2009. Thus, while the 7-day interbank offer rate closed at a negative real rate of return on investment, the 90-day offer rate closed at a marginal positive real rate of return of 0.37 percent in 2010. Similarly, while the average discount rates on 91-day, 182-day and 365-day treasury bills were 3.68, 5.09, and 6.32 percentages in 2010, they were 4.30, 4.13 and 5.91 percentages respectively in 2009. This showed that the returns on Treasury bill returns were negative in real terms at an inflation rate of 11.8 percent in year 2010. The implication of the foregoing for pension fund investment was that the money market did not offer a commensurate return on pension fund investment in 2010 as rates in the market were generally lower than the inflation rate.

In terms of the administration of Pension Funds, the Pension Reform Act 2004 was enacted on 25^th June 2004 to establish a contributory pension scheme for payment of retirement benefits to employees in the Public and Private Sectors. The Law provides that pension funds would only be managed by pension fund administrators; while pension funds custodian is expected to hold pension funds and assets; both are to be licensed by the National Pension Commission under this Act. The aim was to assist improvident individuals save in order to cater for their livelihood during old age. In the case of the private and public sectors, minimum of 7.5% of the employee’s salary is to be contributed by the employer and minimum of 7.5% per cent by the employee. In the case of the Military, a minimum of 12.5% is to be contributed by the employer and minimum of 2.5% by the employee.

In 2009, total Retirement Savings Account (RSA) registrations in both the private and public sectors witnessed remarkable improvements as total RSA holders increased from 4,012,498 in 2009 to 4,542,250 in 2010 representing an increase of 529,752 (13.20%). The public sector accounted for higher proportion of RSA registrations at 2,564,310, accounting for 56.45 percent of total RSA registrations as at 31 December, 2010. The private sector accounted for remaining 43.55% of total RSA registrations as at the end of 2010. The level of compliance with the Contributory Pension Scheme (CPS) has been on the increase in the private sector, notwithstanding the public sector domination of the number of registered participants as at 31 December, 2010. For example, the RSA registrations in the private sector increased from 789,150 and 1,264,071 in 2007 and 2008 to 1,649,045 and 1,977,940 in 2009 and 2010 respectively. Similarly, the rate of growth of the registration was higher in the private sector as it witnessed growth of 19.44% in 2010 as against the public sector that witnessed a growth of 8.49% in the same year. Further analysis of the RSA registration by age distribution of participants shows that the number of contributors in the age bracket “30 - 40” accounted for the highest proportion of RSA holders in 2010 (see Table 2). This age category accounted 35.24 percent of RSA holders in the year; followed by those in the age category “less than 30 years” (28.14% of RSA holders in 2010). These age categories together accounted for 63.38 percent of RSA holders in both the public and private sectors in 2010.

INSERT TABLE 2 HERE
The foregoing in Table 2 suggests that the Nigerian working population is relatively young and that the issue of ageing is not yet a concern for Nigeria as it is in many other African countries. Thus, a large percentage of contributors still have at least more years of contributions under the CPS before they can enjoy pension. It also suggests that pension funds could be successfully invested in long-term instruments in line with the reviewed pension fund investment guidelines. There are 35 Pension Fund Administrators and Custodians made up of 7 Closed Pension Fund Administrators (CPFA), 24 Pension Fund Administrators, and 4 Pension Fund Custodians. The respective membership of Approved Existing Scheme (AES) and CPFAs are 41,669 and 26,605 as at 31 December, 2010. This shows that while membership of AES witnessed an increase of 166 (0.40%), membership of CPFA declined by 61 (0.23%) in the same period. A breakdown of the membership enrolments of AES and CPFA is shown in Table 3.

INSERT TABLE 3 HERE
The total contribution by public sector included N33.02 billion from participating State and Local Governments’ employees and self-funding State and Federal Government of Nigeria agencies. The average monthly contributions for the public sector successively increased from N8.27 billion in 2008 to N11.43 billion in 2009 and N13.54 billion in 2010, giving an increase of 18.46% over the 2009 figures. Similarly, the private sector pension contributions witnessed increase from N91.21 billion in 2009 to N127.35 billion in 2010 (representing an increase of 39.62%); consequently, the average monthly pension contributions by the private sector increased by 39.61% from N7.60 billion in 2009 to N10.61 billion in 2010 as shown in Table 4.
INSERT TABLE 4 HERE
The total pension contributions into the Retirement Savings Accounts of employees in the private and public sectors amounted to N289.81 billion in 2010. The public sector accounted for N162.46billion (representing 56.06% of total pension contributions) in the year; while the private sector accounted for N127.35 billion (43.94%). However, in cumulative terms, total pension contributions as at 31 December, 2010 amounted to N957.97 billion in 2010. This was made up of N567.23 billion (59.21%) public sector contributions (Table 6) and N390.74 billion (40.79%) private sector contributions (Table 5).
INSERT TABLE 5 HERE
Total contribution by the public sector included N33.02billion from participating State and Local Governments employees and self-funding State and the Federal Government of Nigeria agencies. The average monthly contributions for the public sector increased from N8.27billion in 2008 to N11.43billion in 2009 and N13.54billion in 2010, indicating an increase of 18.46% over the 2009 figures. The private sector pension contribution increased from N91.21billion in 2009 to N127.35billion in 2010, representing an increase of 39.62% (See Table 6).

INSERT TABLE 6 HERE
4.0 Material and Method Data on pension fund contributions and money market indicators were obtained mainly from the secondary source, particularly the websites and publications of Central Bank of Nigeria (CBN) and National Pensions Commission (PenCom). The data include the amount of pension fund contributions (PFC), Broad money (M2), monetary policy rate (MPR), Treasury bill (NTB: 91-day) rate (TBR); and other short term interest rates of the financial market including inter-bank call rate (IBCR), savings deposit rate (SDR), net domestic credit (NDC), credit to private sector (CPS), Reserve (Base) Money (BsM), currency in circulation (CiC), bank reserves (BRs), currency outside banks (CoB), demand deposit (DdD), Quasi money (QuM), inflation (INF), and prime lending rate (PLR). The variables are shown in Table 7 (see APPENDIX I). Data on inflation were averages for the year-on-year or annualized rate while money market indicators and pension fund contributions over the period 2006 to 2010 were considered. In doing so, mutiple-variable analysis was employed with the aid of Statgraphic software packages set at 95% confidence level. Also, the dependent variable was regressed on the explanatory variables using the Pearson product moment correlation analysis and multivariate regression models to predict the value of each variable given the values of one or more others. It was also adopted to find combinations of variables that are strongly related, while the Pearson’s product moment correlations technique determined the strength of linear relationships between the variables. P-values were derived with the implication for deducing the relationships that are statistically significant while ignoring those with P-values that are above set alpha level (0.05). The application of Pearson product moment correlations (PPMC) indicated that the correlation coefficients range between -1 and +1 shown in italics derived in the Correlation coefficient Tables. The PPMC measures the strength of linear relationships between the variables, and the number of pairs of data values used to compute each coefficient shown in parentheses, while the third line in each Table indicates the P-value (in bold figures) that tests the statistical significance of the estimated correlations.

5.0 Analysis and Discussion In analyzing the data, one hypothesis was set to determine the relationships between the dependent and independent variables and guide towards attaining the aim of the study. Attempt was made to determine the relationship between the amount of pension fund contributions and the macroeconomic variables. The summary statistics of the analysis are shown in Table 8 (See APPENDIX II), which shows the correlation coefficients of the variables. The correlation coefficients range between -1 and +1 and measure the strength of linear relationship between the variables. Also shown in parentheses is the number of pairs of data values used to compute each coefficient with the third number in each location of the Table being the P-value which tests the statistical significance of the estimated correlations. The P-values below 0.05 indicate statistically significant non-zero correlations at the 95.0% confidence level. The analysis showed that the following variables pairing with pension fund contributions showed P-values below 0.05: AVNM and PFC (P-value = 0.0209; r²=0.93); CPS and PFC (0.0100; 0.96); BsM and PFC (0.0066; 0.97); CiC and PFC (0.0059; 0.97); BRs and PFC (0.0182; 0.94); CoB and PFC (0.0097; 0.96); DdD and PFC (0.0230; 0.93); QuM and PFC (0.0054; 0.97); AVBM and PFC (0.0095; 0.96). This implies that money supply in the economy (narrow and broad money), credit to private sector, base (or reserved) money, currency in circulation, bank reserves, currency outside bank, demand deposit, quasi money, all have significant impacts on pension fund contributions with high and positive correlated relationships amongst them. Also, there is negative correlation between pension fund contributions NDC (r = -0.5747; P-value = 0.3108); IBCR (r = -0.1378; P-value = 0.8251); TBR (-0.8693; 0.0556); SDR (-0.7299; 0.1615). These imply that as pension fund contributions increase the variables decrease. In addition, inflation has strong positive correlation (r=0.7445, P-value= 0.1490) with pension fund contribution over the study period; this is similar to (; 0.7445); PLR (0.6178; 0.3050); MPR (0.3822; 0.5080). The pension fund contributions from the public and private sectors show continuous increase from year to year as shown in Fig. 1
INSERT FIG.1 HERE
Fig. 1 shows that the public sector contributions have increased far more than the private sector’s and all things being equal they will continue to increase into the nearest future. It is expected that the number of participants in the scheme will continue to increase in view of the intensified compliance efforts of PenCom and the resolve by various State Governments to implement the scheme. Similarly, more private sector employers are expected to implement the scheme with the application of sanction regimes by PenCom and further strengthening of the PenCom’s sensitization and awareness programmes. All these are in addition to macroeconomic stability and improved economic activities of the country which are contributing to the growth of the pension industry.

6.0 Conclusion It is envisaged that the more the broad money supply in the economy, there would be high propensity for the multiplier effects on all other sectors, especially the real estate sector, to become enlivened. This in the short- and long- run would enable investors in real estate have access to both equity and debt for real estate development. The implication is that increased money supply in the economy would lead to inflation, and may increase discount rate and return on investment expected by the investor. There will be attraction of more investors into real estate investment opportunities and subsequently increase in demand for finance in the long-run. The growth rate of money supply would affect the aggregate economy and hence the expected returns while increase in broad money (M₂) growth would indicate excess liquidity available for credit to the private sector. Similarly, low interest rate has the capacity to stimulate business growth by lowering the cost of borrowing and lowering value of currency value and therefore stimulate export. The regime of low interest rate usually create better demand for and increase the value of real estate; and further creates more spending in the macro economy and thereby drive up inflation while more people expected would choose property as a hedging option against inflation. High interest rate will however increase the cost of borrowing, decrease the demand for bank real estate finance in view of expensive nature of the loan repayment terms and may hinder investment in real estate. As a result of money market impact on money supply in the economy, which consequently affect the quantity of money available for real estate development out of the quantity available for all sectors of the economy; avenue has been created for people to invest in real estate in through the individual pension contributions. In respect of the role of pension fund contributions to solving housing problem in Nigeria, the total combined private and public sector pension contributions of N957.97bn as analyzed, hopefully, will contribute significantly to reducing huge deficit in housing units. The sum to be invested could be spread over a number of years to provide housing units through the private sector partners to reduce the shortage in real estate. This is attainable with combined efforts of the government, economic regulators and other market stakeholders that would be required to kick-start and achieve some level of growth in the real estate sector. Government would provide enabling environment by tightening the existing law to prevent fraud, while ensuring that the funds should truly be directed to providing housing units with contributors to the scheme actually benefiting from it.

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