Banking in Nigeria: Should i open a fixed deposit account?

EJ
By Emeh Joy
Banking in Nigeria: The Fixed deposit account, its advantages, how to open a fixed deposit account in Nigeria and how to calculate interest on your fixed deposit investment

Banking in Nigeria has improved over the years as banks have improved on transaction methods. Do you want to open a fixed deposit account or you want to find out more about how to invest in it? Read this business article.

Many Nigerians have no idea about it, but a fixed deposit account is an investment account. You get to save your money; and not just that, with the fixed deposit account, you also get an agreed interest rate.

Let' share with you more detailed information about the fixed deposit account in Nigeria, how to open the fixed deposit account in Nigeria, the advantages of a fixed deposit account etc.

What is a fixed deposit account?

In the olden days, people stashed their money in earthenwares, holes and even mattresses, all in the bid to save them. But, things are done differently in this modern day.

Now, we have the banks. We also have different banking systems and various types of accounts such as the fixed deposit account, savings account and current account.

Each bank account type has its own unique features, advantages and disadvantage. Using the right account type is one of the ways to make your money work for you.

So, what is a fixed deposit account?

A fixed deposit account type is one which enables you to invest a specific amount of money (fixed deposit) at an agreed interest rate and tenor.

The fixed deposit account is a good way of saving money, investing it and earning interest at the end of a tenor, depending on the rate

What this simply means is that you agree with the bank to invest a specific amount of money (N100,000 for instance), in your fixed deposit account. At the end of a given tenor (6 months, for example), you gain access to your fixed deposit with an additional interest (12% of the amount deposited, for instance).

All banks in Nigeria offer a fixed deposit account type of investment. However, the interest rates typically vary from one bank to another.

What are the typical features of a fixed deposit account/investment?

  • All fixed deposit accounts have an investment period called 'tenor' which is usually a minimum of 30 days and a maximum of 360 days.
  • There is a minimum opening balance which is usually N100,000
  • If you terminate your investment before it matures, i.e. before the end of the tenure, you will have to forfeit the accrued interest which you did not earn. This means you will only be paid the interest earned during the period your money was in the bank.
  • The interest paid to you is subject to Withholding Tax (WHT) and can be deducted from the interest you earned.

Benefits of opening a fixed deposit account

Now, you might be wondering why you need a fixed deposit account or what you stand to gain from opening one. Here are some advantages of opening a fixed deposit account in Nigeria.

  • When compared to the regular savings account, the fixed deposit provides a higher interest rate.
  • With the fixed deposit account investment, you are guaranteed of your returns.
  • The fixed deposit bank account is quite flexible as you can open it with different banks offering different terms.
  • You have the potential to earn interest regularly - monthly, quarterly or yearly
  • It has high liquidity as you can terminate the money to fund your short-term liquidity needs.
  • It encourages a good saving habit.

What are the requirements for opening a fixed deposit account in Nigeria?

Just as it is with opening a savings account, certain documents would be needed in order to open a fixed deposit account. First, you should be up to the legal age of 18.

The following is typically needed as well:

  • A valid means of identification, e.g. Passport, National ID, Driver's licence
  • A fixed-term deposit form provided by the bank which you have to fill
  • Your utility bill, e.g. electricity bill, rent receipt
  • Passport photographs
  • Customer investment advice

How to calculate the fixed deposit interest

If you want to open a fixed deposit account, you might also want to learn how to calculate the interest for your fixed deposit investment.

Learn how to calculate the interest, net interest and total amount earned at maturity of your fixed deposit account investment

You still remember your mathematical formula for calculating simple interest right?

The formula goes like this:

Interest = Principal * Rate * Time

It still applies to calculating interest for fixed deposit investment.

So, let's give an example (Example 1):

Let's say Mr Chike invests N100,000 at a 5% annual interest for one year, what is the interest?

We calculate:

Principal = The total amount of money invested, i.e. N100,000

Rate = 5% (converted to decimals) = 0.05

time = 1 year

Interest = N100,000 * 0.05 * 1

= N5,000

Example 2:

If Mr Yusuf invests N100,000 at 5% interest rate for 60 days, what is the interest after 60 days?

Principal = N100,000

rate = 0.05

time = 60/365 (time here is calculated in years and since the tenor runs for 60 days, we divide by the number of days in a year).

= N100,000 * 0.05 * 0.16

= N800

How to calculate the interest net of withholding tax for fixed deposit

Remember that Nigerian banks charge you 10% withholding tax on interest. Now, 10% has to be deducted from the interest earned in order to get the net interest.

So let's continue with the first example:

Mr Chike's interest after investing N100,000 at the rate of 5% for one year is N5,000.

Withholding tax = 10% (0.1) * N5000 = N500

Net interest = N5000 - N500 = N4,500

Total amount Mr Chike should earn at maturity = principal + net interest

= N100,000 + N4,500 = N104,500

Note that:

Banks offer different rates and terms for fixed deposit investments. Check with different banks and go for the ones that offer more competitive rates.