Commercial papers (CPs) have become an important instrument for securing short-term financing within Nigeria’s financial system.
Data from FMDQ showed that the volume of CP issuances declined slightly from 140 in 2023 to 133 in 2024. Despite this, there was a 12.2% drop in corporate issuance value, falling to N790 billion.
At the same time, retail interest in CPs has grown significantly, with Google Trends indicating a rising search volume.
A commercial paper is a short-term loan facility that typically ranges from 30 to 270 days and can last up to one year. In Nigeria, CPs are available on the capital market for tenors of up to 270 days. They are usually issued at a discount and redeemed at face value on maturity, similar to treasury bills.
Large corporations with strong credit ratings often issue CPs, which are quoted, traded, and reported on FMDQ Exchange platforms. Nigerian businesses prefer them for short-term funding over long-term debt, as they provide quick access to cash to sustain operations and expansion.
The process involves key players such as guarantors, rating agencies, issuers, dealers, arrangers, issuing and placing agents, and paying agents. Each plays a crucial role in ensuring smooth issuance and redemption.
The yield from CPs represents the profit earned by investors, calculated using either the discount yield method or the money market yield method. Factors influencing yields include discount rates, market conditions, tenor, and face value. Central Bank of Nigeria (CBN) interest rates also impact yields, with higher rates generally resulting in higher returns. Inflation is another factor, as investors seek compensation for reduced currency value.
Issuers with high credit ratings typically offer lower yields due to reduced risk, while those with weaker ratings must offer higher yields to attract investors. Nigerian investors can purchase CPs directly from issuing companies or through dealers and licensed stockbrokers on the secondary market.
To invest, individuals usually need a brokerage account managed by a reputable firm under the guidance of a licensed financial advisor.
Commercial papers offer flexibility as short-term investments and are generally considered safer than stocks since they are issued by established companies. They also provide attractive interest rates, often more appealing than bonds or savings accounts.
However, risks exist. CPs are unsecured loans, meaning defaults or bankruptcies could affect investors. Other risks include interest rate fluctuations and liquidity challenges if CPs cannot be sold before maturity.
Currently, mutual funds, pension funds, insurance firms, and money market funds are the most active players in Nigeria’s CP market. The market has consistently delivered attractive risk-adjusted returns with liquidity benefits.
For Nigerian investors, CPs present an accessible and useful addition to a diversified portfolio. Key considerations include evaluating the issuer’s credibility, defining personal goals, assessing risk tolerance, and engaging regulated financial advisors. When managed properly, CPs can help balance risks while enhancing return stability.
