Nigeria targets building Africa’s dominant IFC

Johannesburg, the business capital of South Africa, is the only city in Africa that can lay claim to being a fully fledged international financial centre (IFC). No others yet have equity and bond markets deep enough to entice many foreign companies to raise capital there.

But the race to set up another African IFC is on. Several countries hope to establish themselves as global financial hubs, including Kenya in the east of the continent. However, Africa's second IFC is most likely to be created in west Africa. Ghana would like Accra to take the designation, and Morocco is fiercely pushing for Casablanca to be the region’s financial capital.

Size matters

If economic size was the main criteria, there would be little stopping Nigeria, which has Africa’s second biggest gross domestic product (GDP) and is expected to overtake South Africa within the next five years.

The government in Abuja harbours such ambitions. Launching an IFC is a major part of its ‘Vision 2020’ project, which entails Nigeria becoming one of the world’s top 20 economies by that date.

Nigerian officials realise that they have to act fast, lest a competitor beats them to it. “Nigeria, with 70% of the GDP of west Africa [south of the Sahara], should be the financial centre for the region,” says Suleiman Barau, a deputy governor at the country’s central bank and the person in charge of building an IFC in Nigeria. “But our ambitions go [further]. We want to be the financial centre for Africa. We’ll have to do that quickly because South Africa wants to be the financial hub of Africa. So do Ghana, Botswana, Rwanda and Morocco. So we cannot wait.”

One of the main steps towards becoming an IFC is putting in place a regulatory and legal framework. To this end, Mr Barau says legislation in the form of the Nigerian International Financial Centre bill, which has already been passed by the country's lower house, should be enacted in the next six months. He believes this will greatly advance Nigeria’s financial law, which he says is still “way, way, way behind” that of the world's major IFCs.

The bill will ensure that all disputes, apart from criminal-related issues, are settled within the financial centre, rather than having to go through the country’s notoriously slow courts. “We want an environment where all international financial institutions and local ones can play and provide financial services in a way that would have taken us 50 years to deliver [without putting in place a new legal framework],” says Mr Barau.

Lagos or elsewhere?

Nigeria's next task will be choosing where to locate the IFC. Lagos, home to most of Nigeria’s banks as well as its stock exchange, would seem the obvious choice. But Mr Barau says other cities will have the chance to bid for it. “All that is needed is a piece of land, some buildings and the legal framework,” he says. “So it doesn’t have to be in Lagos. It could be in Abuja.”

Local banks dominate the banking sector. A few foreign ones, such as South Africa’s Standard Bank, which operates through its subsidiary Stanbic IBTC, are present in Nigeria. However, Mr Barau hopes the new financial law will entice more to come, including major investment banks such as JPMorgan, which has a representative office in the country and is considering applying for a full banking licence, partly in anticipation of the establishment of an IFC.

“Why are more international banks not here? Because they don’t find the market and necessary infrastructure for them to operate,” says Mr Barau. “But that’s the good thing about the financial centre. We’ll make it attractive for them. We’ll provide the infrastructure.”

Along with the size of its GDP, another factor in Nigeria’s favour is that it already has deep capital markets. Its stock exchange and banks were battered when oil prices crashed four years ago, but reforms over the past two years have revived confidence in the financial system. Authorities even think that the market capitalisation of the country’s bond and equity markets – currently about $85bn – can rise to $1000bn by 2016.

Sharia compliance

Moreover, roughly half of Nigeria’s huge population of 160 million is Muslim, leading many analysts to speculate it could become Africa’s first Islamic financial centre. Policy-makers are encouraging the development of sharia-compliant finance. The first Nigerian Islamic lender, Jaiz Bank, opened in February, while Stanbic IBTC was recently granted a licence for an Islamic window. “Islamic finance won’t be the main focus, [as is the case] in Malaysia,” says Mr Barau. “But it will certainly be a segment that will help the financial centre develop.”

However, there are still plenty of obstacles. Not least are the corruption and inefficiency that dog Nigeria and puts many foreign investors off it. Its infrastructure is also badly lacking when compared with would-be competitors such as Casablanca, while many expatriates view the country as a hardship posting. Mr Barau admits that improving Nigeria’s schools and hospitals will be vital to enticing foreigners to work in its IFC.

But because of its sheer size, international investors looking towards Africa cannot afford to ignore Nigeria. This alone gives it an advantage over all its rivals trying to establish Africa’s second IFC.