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AfricaApril 6 2008

Cashing in

Political stability, economic growth, foreign investment, oil wealth, a growing middle class; there are many reasons why Nigeria’s banks have amassed large capital bases. As Charlie Corbett reports, the dilemma now is how to use it.
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Nigerian investors across the globe held their breath on February 26 as a panel of five judges in Abuja mulled over a petition by opposition leaders to have president Umaru Yar’Adua’s election declared null and void. The consequences of such a ruling would have dealt a severe blow to the nation’s hard-won political stability, and in turn hit the blossoming capital markets.

One Nigerian specialist told The Banker that of the 40 potential investors he was slated to meet in New York recently, the vast majority would have reconsidered their decisions to invest if Mr Yar’Adua’s election had been declared illegal.

Ruling joy

Nigeria’s Independent Electoral Commission ruled in favour of the president. A collective sigh of relief was heard throughout the capital markets and a further bout of political instability was avoided.

As a result of such a prolonged period of stability, Nigeria’s banks have been able to build up solid capital bases. The successful consolidation of the banking sector in 2005 from more than 85 banks down to just 24 has meant that Nigerian banks have enjoyed a period of almost unequalled capital growth.

Total deposits bases across the banking sector have ballooned from N2800bn ($24bn) in 2003 to well over N10,000bn today, an achievement which is not lost on most foreign observers. The Central Bank of Nigeria has come in for considerable praise in its handling of the consolidation, and the banks themselves have managed the process in an orderly and responsible fashion.

However, many feel that the time has come for Nigeria’s banks to shift their gazes away from capital raising and towards capital employment.

“There is a feeling that two years ago it was a cutting-edge, quite fresh market but latterly I think people have, to some extent, had their fill. Many offshore investors would like to see more from Nigerian banks in terms of employing those vastly enlarged capital bases. They want to see more tangible qualitative changes,” says one Lagos-based banker, who does not wish to be named.

Loan ratios

The leaps and bounds that the banking sector has taken over the past three years is reflected in non-performing loan ratios. Before consolidation in 2005, some 20% of loans made by Nigerian banks were non-performing. That figure has now fallen to just 8.4%. But these impressive figures do not tell the whole story. The next step for Nigerian banks is to grow their loan portfolios, which will inevitably incur more risk and subsequently have an impact on the non-performing loan statistics.

Some fear that the number of non-performing loans could increase rapidly back in the other direction when the banks start to grow their loan portfolios. According to one observer: “You can double your lending, but potentially increase your risk exposure much more.”

Financial strategies

The question therefore remains: what strategies are Nigerian banks employing as they look to increase their lending, build sustainable profits and boost returns to their shareholders, without hiking their risk profile to unacceptable levels?

The most obvious answer for banks looking to expand would be to exploit the vastly untapped retail market in Nigeria. Of a total population of about 150 million people just 15 million actually hold a bank account. In terms of potential, the market is enormous. Added to this are the vastly superior yields on offer to retail lenders when compared to plain vanilla lending to big corporates.

Olukayode Pitan, executive director of Unity Bank in Lagos, says the battleground for most Nigerian banks in the future will be for the consumer market. “The key is how to reach these people,” he says. “The middle class is coming back. Consumer products are being introduced. We are beginning to see Nigerian credit cards, and lease facilities for cars and household items. That market is huge and is increasing.”

However, he adds that most of the banks are still tilted towards the corporate market and big conglomerates. “It is easier for the bank to give loans out to big corporations. Of course, the spreads are narrower and that puts pressure on profitability but they are also safer.”

Next frontier

Segun Agbaje, deputy managing director of Guaranty Trust Bank (GTB) in Lagos, agrees. “The next frontier is not retail, the frontier is still corporate [lending] – at least for the next two to three years,” he says.

Huge challenges face any Nigerian bank that wishes to take on the retail market, says Mr Agbaje. “There is no credit bureau and the legal framework does not support retail. Most of the growth has to come from the high end. Retail... remains less than 10% of our loan book, and I think it will remain less than 10% over the next two to three years.”

Michael Hugman, a local and sovereign strategist for Standard Bank in Lagos, agrees. “Nigeria doesn’t really have a functioning bankruptcy law and there is no proper land-titling legislation, which would make the market-based exchange of title deeds possible. This becomes critical if you want to lend to individuals on a retail basis or for mortgage-related lending,” he says.

For banks like GTB to become more comfortable about retail lending, two fundamental issues need to be dealt with: credit history and Nigeria’s far from adequate legal framework. On the issue of credit history, something tangible is being done. The United Bank for Africa (UBA) has partnered with 11 Nigerian banks to establish a credit bureau called the Credit Reference Company of Nigeria (CRCN). It was opened this year and will be run by US-based credit agency Dun and Bradstreet.

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UBA Capital’s new chief executive, Mathias Chika Mordi, has been appointed chairman of the credit bureau. For Mr Mordi its establishment is a crucial step towards putting banks more at ease with lending to the retail sector.

 

Identifying a challenge

“There is a dearth of reliable data at the moment and huge challenges with unique identification,” says Mr Mordi. “A person could walk in with three different official documents... all three of them would have been duly issued by an authority, but all three show different people. A serial defaulter can go to separate banks and continue to borrow.”

The establishment of a credit bureau is undoubtedly a big step towards alleviating such problems, but it takes time to build up a history of clients. Mr Mordi anticipates that it will take at least 18 months before the CRCN will have anything like the kind of customer information that banks need in order to make considered lending decisions.

Thinking small

Lending to small and medium sized enterprises (SMEs) is another area that could prove hugely lucrative to banks in the future, although it is another area fraught with difficulties. In an attempt to diversify the economy away from the energy sector and towards the creation of a solid manufacturing base, the CBN set up an SME equity investment scheme in 2001. The scheme required banks to set aside at least 10% of gross profit to finance SMEs. Aside from this ruling, however, the drive towards lending to SMEs among Nigeria’s banks has been lacklustre at best. The risks of investing in this sector remain high and huge obstacles lie in the way of accommodating Nigeria’s largely informal, cash-based economy.

However, some banks are taking up the challenge. Lagos-based Intercontinental Bank has formed a partnership with South African microfinance company Blue Financial Services. The joint venture will have a N3bn capital base, which it will invest in self-employed Nigerians as well as the growing band of investment co-operatives springing up throughout the country.

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Erastus Akingbola, chief executive of Intercontinental Bank, says: “There is no way that the economy will grow unless we can empower the grass roots to do business for themselves and get off the poverty line.”

 

Untapped potential

Mr Akingbola believes that there are 80 million people in Nigeria who currently keep their money under their mattresses, who can be convinced to come into the banking fold. He admits, however, that it is an ambitious project. “You need a different structure to attend to retail... The first thing is that you need to spend money on branches. If you don’t have branches you will not be able to get at deposits or reach your customers. In addition, you need to spend money on technology. We are bringing in ATMs in droves and improving our IT capabilities – all of this costs a lot of money.”

Many banks are resigned to the notion that a flourishing retail sector is, at best, two to three years away. The oil and gas boom has indeed created a growing middle class, but there is also a big cultural barrier to overcome. In a predominantly cash-based economy like Nigeria’s it is very hard to convince people to hand over their hard-earned money, especially if they feel that they might not be able to withdraw it in a hurry.

There are, however, other ways that Nigeria’s banks can invest their newly created capital bases. The country’s infrastructure is ripe for enormous investment. A single trip to Lagos is enough to convince any outside observer that the potential for investment is endless, whether it is in transport, property or power. For the first time, Nigerian domestic banks have enough money to take advantage of this screaming potential.

Project funding

Unity Bank’s Mr Pitan says: “Pre-consolidation Nigerian banks could not fund big projects with tenors of more than five years, because most of our deposits were short-term money. We have more long-term money now and more banks are getting involved in funding infrastructure. Now we are seeing banks looking at 10 to 20-year tenors. This is all part of the fallout from raising money.”

Okey Nwosu, chief executive of First Inland Bank, agrees. “With the size of capital that the banks have, we find ourselves being able to handle a number of transactions that before now would not have been handled by banks locally. This increases the volume of business that we can do,” he says.

The key to solving Nigeria’s chronic infrastructure problem, says UBA’s Mr Mordi, is through public-private partnerships. He says: “No one bank can do it and the government can’t do it alone, but the government can help to create an environment for private-public partnerships to work – in terms of fiscal incentives and policies.”

The road to co-operation

One shining, early example of the government and local banks working in co-operation was the Lekki toll road in Lagos. The funding for this vital piece of Lagos infrastructure came from a combination of federal, state, domestic and foreign banks. It is not just in Lagos – across the nation, opportunities are springing up for domestic banks to invest in critical infrastructure, whether it is in housing, transportation or, most crucially, power.

Oil and gas is another prime opportunity for Nigerian banks to invest their capital. Previously the exclusive domain of wealthy foreign multi-nationals, Nigeria’s banks now have the requisite scale to invest in the country’s biggest money spinner. The Nigerian National Power Company is looking for $3.8bn from the private sector this year and now, more than ever, local banks are able to participate.

Talent shortage

For the sector to really take off, however, Nigerian banks will have to face up to the one problem that haunts all aspects of their growth prospects. Whether it is exploiting the retail sector, expanding into regional sub-Saharan Africa or investing in energy and infrastructure, a chronic shortage of talent in Nigeria is holding the banks back.

GTB’s Mr Agbaje says: “Human capital is probably the key impediment to growth in Nigeria today. If you look at the education system, in my opinion it collapsed 10 to 15 years ago.” Most Nigerian banking chiefs that spoke to The Banker in Lagos agree that something needs to be done about the dearth of experience.

UBA’s Mr Mordi says: “The industry is growing very quickly so there is a stretch on the pool of labour... banks are more international now and there is more intense internal competition, which has put pressure on the quality of human capital.” UBA itself has increased its branch network from 400 branches in 2005 to 800 today. On top of this, it now operates in 10 countries, compared with just three in 2005. This kind of dramatic expansion calls for qualified and experienced staff.

But finding appropriate staff is easier said than done. The banks are competing with several other rapidly expanding industries in Nigeria, including telecommunications and the oil and gas sector, which depletes the pool of skilled labour available and inflates wages. Most banks have established rigorous training schemes and some are even funding local education projects, but all of this takes time. The short-term solution is to bring in foreign talent – either Nigerians living abroad or expatriates.

Unity Bank’s Mr Pitan says: “You need people with experience in structured transactions and asset management. These are the areas where banks are prepared to pay top dollar to attract talent. Banks in Nigeria are no longer just commercial banks, they are investment banks. The competence of the management is being stretched. The type of risk management required today is not the same type that was required before.”

Too much too soon

For Mr Pitan, this brings with it serious concerns. He says: “The fear I have is that if care is not taken, people will be put in positions for which they are not competent. The whole craze in the banks was to bring in deposits – so people were promoted on the basis of how much they could bring in. Now what is required goes beyond just being able to attract deposits.”

With the rapid expansion of the sector and increasing pressure on Nigerian banks to deliver healthy returns to their shareholders, the hunt for talent could not be more important. The Nigerian banking sector is at a crucial stage of its development. It is on the threshold of enormous growth, but the talent shortage must be addressed.

In the words of Mr Agbaje: “Give us all the right sort of people and I think we’re ready.”

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