Analysts Warn PenCom’s New Rules On CPs Could Stifle MSMEs 

The National Pension Commission (PenCom) has introduced new requirements for Pension Fund Administrators (PFAs) investing in commercial papers (CPs), a move analysts warn could marginalise small businesses already grappling with limited access to affordable financing.

PenCom, in a recent statement, explained that the new regulations aim to strengthen risk management in the investment of pension funds. Under the revised rules, PFAs can only invest in CPs issued by companies with a minimum credit rating of ‘A.’ However, CPs from entities rated ‘BBB’ may qualify if guaranteed by a sovereign-backed agency, a multilateral development finance organisation (MDFO) with a minimum ‘A’ rating, or a commercial bank also rated at least ‘A.’

This more stringent framework could effectively restrict smaller businesses, which often lack such high ratings, from accessing capital through the CP market.

“PenCom is going to clip this market. Only a few big names will have it good with this latest development,” said Mr. Abdulrauf Bello, portfolio manager at Cowrywise. “This means the cost of capital will be higher for smaller companies and relatively lower for larger corporations.”

CPs are short-term debt instruments that corporations use to fund operational liabilities. However, small businesses, which often rely on CPs as an alternative to high-interest bank loans, may now face additional hurdles.

https://astudity.com/pencom-lifts-ban-on-pension-fund-investments-in-commercial-papers/

Decline in CP Market Activity 

The CP market in Nigeria, already under pressure, saw reduced activity in 2024. Data from FMDQ shows CP issuances dropped to 133 from 140 in 2023, with the total amount issued declining 12 percent to ₦790.4 billion from ₦900 billion the previous year.

Investment expert Mr. Micheal Oyebola, who works with a PFA and analyses financial markets at Moneycounsellors, acknowledged the challenges but emphasised the necessity of the new rules. “It is important to sanitise the system,” he said. “While smaller businesses are at risk of being crowded out, their vulnerability to default in payment cannot be overlooked.”

Mr. Oyebola stated that the updated requirements would not negatively impact pension fund returns, as PFAs have other high-yield instruments, including treasury bills, to invest in.

The CP market, valued at just under ₦1 trillion, pales compared to Nigeria’s pension fund industry, which boasts total assets under management of ₦22.3 trillion as of November 2024.

In December 2024, PenCom temporarily halted investments in CPs issued by limited liability companies, citing a rise in CP investments by Licensed Pension Fund Administrators (LPFAs). The regulator expressed concerns over the role of capital market operators acting as Issuing and Placing Agents (IPAs) in these transactions.

While the move aims to secure pension funds and enforce compliance, stakeholders worry that small businesses, which often lack sufficient credit ratings or guarantees, will be disproportionately affected.

The analysts agreed that while the rules may reduce risk exposure for pension funds, they could exacerbate the funding squeeze already being felt by small and medium-sized enterprises (SMEs).

“This will likely lead to a market dominated by large corporations, leaving smaller businesses to compete in a system that is less accessible and increasingly expensive,” Mr. Bello warned.