- Stakeholders Lament High Interest Rate
Capital market stakeholders have stressed the need for government to review the current interest rate downward to enable listed firms enhance profitability and increase investors’ access to the stock market.
The Central Bank of Nigeria (CBN) had maintained that the Monetary Policy Rate (MPR) remains at 14 per cent.But the Registrar Chief Executive, Institute of Capital Market Registrars (ICMR), David Ogogo,in an interview with The Guardian, bemoaned the current interest rate, saying that it is disincentive to investment for both foreign and indigenous investors, particularly , when compared to the current inflation rate.
According to him, if interest rate is reasonably low, listed firms can borrow long term loan, improve profitability and make more investment in the stock market.
“If interest rate is high, it would not be lucrative to investors to invest in the capital market when compared to the money market but if it is reasonably low, listed firms can go to the banks, borrow money and inject into the businesses and make profit.
“Then businesses would flourish and make more money to pay dividend because the interest rate repayment is not too much. This would encourage more investment in the stock market but if it high, companies cannot borrow because if they do, they cannot repay.”
A stock broker, Sola Oni explained that the relationship between interest rate and stock market is inverse. This, according to him, implies that when interest rate is low, speculators move their funds from the money market instruments to the stock market to make a kill.
As a corollary, the same speculators move from the stock market to other asset classes, especially, fixed income securities when the interest rate is high.
By this logic, he added that it is assumed that the current interest rate would boost investment in the fixed income securities while it may depress investors’ appetite for equity investment.
The Partner, Constant Partners Limited, Niyi Omojola said: “The current interest rate is posing a challenge to the market. Issuers do not want to borrow for a long period on a high rate; they would want to borrow on a short period.
“ The same thing with investors, as the interest rate is high, they do not know how the future looks like, so there is a temptation for investors to borrow at a short period also so you see exposures in commercial paper and short term borrowings and as long as the rate has gone up, it slows down issuers and long term investors.”
