The Depositors’ Dilemma as Ponzi Schemes Beckon

Money Palaver

The author.

By George Eze Emeghara

Nigerians who have any spare cash these days are apparently in a quandary over how  to get decent returns on their money.

This is probably why they are leaving their cash in bank vaults. According to the Central Bank of Nigeria deposits are rising even with the very low interest rates the banks are paying.

The low interest regime prevailing in the banks is part of deliberate moves by the CBN to discourage people from leaving their money in  bank vaults. The CBN wants to compel them to invest their money in productive ventures which will create jobs and boost the economy.

But it doesn’t seem to be working as the rising volumes of deposits indicate. Obviously, the depositors don’t want to take any chances with their money and prefer to ” park” it in the bank until further notice. They  can’t really be  blamed. What businesses can they start in a climate such as the one prevailing in Nigeria.

Electricity remains a major challenge and insecurity is on the rise at a time purchasing power has been driven down in the face of obstacles that include multiple and arbitrary taxation. Many manufacturers  are complaining about rising stocks of unsold inventory in their ware houses. However,  keeping the money in the bank is also not a prudent option in the circumstances given the very poor interest rates the banks are paying – about 1.5 percent per annum.

Banks Shun Fixed Deposits

Some of the banks are no longer accepting fixed deposits to avoid paying the slightly higher rates such deposits usually attract.  Those  people who are prepared to  close their eyes to the poor interest rates and dump their money in the banks may not realise that they are also losing serious money  to inflation and currency devaluation. With inflation said to be running at about 15 percent, a deposit of one million naira in January 2020 will earn 15,000 naira in interest after one year. It will also  lose 150,000 naira to inflation, giving a net loss in value of 135,000 naira.

Abuja’s upscale Maitama district…the rich turn to gold.

When the effects of currency devaluation are factored in, the situation becomes even more dire.
In January  the naira exchanged for 360 to the dollar on the streets, it is now about 450 to the dollar, which represents a loss of 25 percent. Assuming it does not slide further, by the end of one year,  the 1 million Naira deposit would have lost 250,000 to devaluation. Add to the 135000 Naira lost to inflation, the net loss  in value, or in terms of what the money could have purchased at the time it was deposited  in January, would  be 385, 000 naira or 38.5 percent. Two and a half years of this erosion in value and nothing will be left of the money in real terms.

Turning to Gold

All that  will be left will be worthless paper.

Sadly, the depositors who realise this fact can’t find what to put their money into. This is especially so for the low to medium net worth depositors.

The ones with high net worth who have a lot of money are buying up property, and foreign currencies which are a lot more stable. This move to acquire foreign currencies is contributing to the scarcity of foreign exchange and weakening the naira further.  They  are also buying gold and other non- perishable and easily convertible commodities.  The low and medium  net worth depositors are in the majority and they are also looking for where to invest  their money.

They don’t have the kind of money which can buy land, houses or large quantities of foreign exchange and valuables. Ordinarily they  are people who usually buy stocks, treasury bills and other investment instruments which have  low entry prices. Now, they have doubts about the  stock market which is not doing well. Same applies to the  Treasury bills.  Many people are no longer interested in investing in them.

Ponzi Schemes Beckon

In view of the foregoing, it is not a surprise that it mainly this group of bank customers, the  low to medium  depositors, who patronize the various businesses and schemes flying around.
These  include all manners of network marketing companies and their products, the schemes that tell you to send money to Mr X and get double or triple what you sent within hours, and the ones that  pay fantastic interest rates of between 10 and 15 percent flat per month.

It is surprising to see that people are flocking to invest in  the schemes or instruments promoted by  companies which are not licensed to collect deposits without finding out what they do with the money.Some of the companies say they are trading in Foreign currency or doing ” Bitcoin” business.

It is doubtful that the returns on Forex trading, with all its unpredictability and fluctuations can steadily or regularly  return the ten or more percent  which is paid every month to those who have deposited their money with such companies.

The average depositor appears doomed.

The fear is that at the end of the day those investment schemes may just be Ponzi schemes where by the money deposited by new investors is used to pay the older ones.  Ponzi schemes are not new in these parts. There have been many over the years which have ended up gyping Nigerians of their hard earned money. But, apparently, Nigerians never learn.

They still put their money in them maybe because they are risk takers, foolhardy,greedy or plain ignorant. For now it appears that the average depositor is doomed if he does and doomed if he doesn’t. Does he leave his money in the bank or does he  take a risk with the numerous options he is presented with each day? Can anyone help him?

George Eze Emeghara is a Nigerian journalist, writer and public affairs commentator based in the southeastern city of Owerri. Money Palaver is his weekly column for