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AfricaApril 1 2007

Retail jump-start

Nigeria’s retail environment is developing fast, says Nick Kochan, but further growth is hampered by the absence of a credit checking system and a national ID card.
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Nigerian banks have gone through a marketing revolution in the past two years. The need to satisfy a growing body of consumers who want the services of a bank to improve their lifestyles has triggered a massive rethink at the highest levels. Today banks are focusing on the need to present themselves in a more accessible and attractive way. Gone are the days when Nigerian bank branches were dowdy and their messages were stale and largely driven by wholesale values. Today the consumer is king and the marketplace is a more colourful and competitive environment.

The arrival of a new type of consumer has coincided with banks’ ability to spend heavily on the image-builders, the retail consultants and the expanded branch networks. Retail banking is consuming funds worth billions of naira, which banks have raised in the market in the course of recent restructuring. Banks also used the consolidation process to acquire other banks with branch networks in strategic positions. The retail environment is as competitive as it is expansionary.

Products being targeted at the new Nigerian consumer cover the gamut of banking services. They are typically mortgages, insurance, pensions and investment products. Fewer than 10,000 mortgages have been sold, and the opportunity for expansion is vast. Banks stress the importance of keeping the message simple and straightforward, and the products likewise. Ladipupo Balogun, managing director at First City Monument Bank (FCMB), says: “Making sure the products are as simple as possible is a key aspect. The value proposition for a retirement savings account is simple. Our mutual funds are simple. Life insurance is also kept simple. Everyone must have life insurance when they have a retirement savings account. You must take a life insurance policy when you have a mortgage policy.”

Overcoming prejudices

The appetite is great, but many consumers will be unfamiliar with the services and facilities. Banks have to combat a latent suspicion in the country after many years where they have been synonymous with bad practices and poor reputations. Many consumers have substantial funds that have been retained outside the traditional banking system which banks would like to obtain and lend against. Today’s banking advertising is geared at introducing the concept of lending and borrowing as well as specific product information for the consumer. FCMB Bank, for example, has described its aspiration as becoming the “benchmark for excellence and customer experience”.

Branding consultancies have been hired to help banks develop their strategies. Insight Communications, for example, established a bright and consumer-oriented style for Bank PHB (formerly PlatinumHabib Bank). Francis Atuche, managing director of Bank PHB, pinpoints eight salient characteristics for the bank’s brand.

He describes strategic initiatives that “enable us meaningfully to engage with our stakeholder groups and serve customers better than the competition”. He stresses the marketing concept of “total value creation”.

He says: “Our bank will not measure its success primarily by the size of the profit at year end, but by how it has made a positive difference to the lives of customers, staff, investors and society.” He says Bank PHB has evolved a flat operating structure that ensures quick decision making and superior customer service. Mr Atuche cites trust and audacity as key facets of the brand. Finally, the bank aims to be forward-looking, committed to growth and respectful of its partners.

The evangelical retail culture is equally evident in the approach taken by Intercontinental Bank, where chief executive Erastus Akingbola says: “The main driver of excellence in customer service delivery is the philosophy of making customers happy. This is encapsulated in our corporate campaign theme, ‘Happy Customer, Happy Bank’.” The campaign is led by the chief executive himself, and Mr Akingbola says he takes text messages and phone calls from customers and resolves their problems. He adds: “This strategy has taken customer service to new heights in the bank. We aim to make a difference through excellent service delivery. We want to build and preserve customers’ wealth and ensure long-term value and happiness for our customers.”

The financial impact of this retail revolution on some of the banks will be dramatic over time. FCMB, for example, says that it expects consumer banking to account for half of its earnings over the next four years. According to FCMB’s Mr Balogun: “In four years, consumer banking will generate $100m a year. It will account for 50% of the bank’s earnings and 40% of the group’s earnings. The products will include mortgages, wealth management, personal loans and retirement savings accounts [RSAs], which are mandatory under the new Pension Reform Act.”

Macroeconomic conditions in Nigeria will make mortgages more attractive. Developments in the capital markets are ensuring longer term funds at better rates and this is adding to the competitiveness of the product. Mr Balogun expects interest rates to fall so banks can raise funds for mortgage lending at 10%, or 100 basis points above the prevailing 9% yield on three-year government paper.

Yields in sovereign paper in naira are set to fall to between 7% and 8%, enabling the cost of mortgages to fall dramatically from today’s 16%-18%. Mr Balogun says: “Nigerian banks will be firmly within the single-digit interest rate band and mortgage-backed securities will inevitably be priced at similar to what bank paper is priced at or even better, depending on the structure.

“We expect that over the next few years long-term money will be available at fairly low rates to fund mortgages.” Mr Balogun says his mortgage products will have 20-year terms, but he expects terms available to the consumer to increase over time with the lengthening yield curve.

Cheap money is also driving interest in the mortgage products supplied by Oceanic International, says Cecilia Ibru, managing director of Oceanic Bank International. She says: “When the government begins to issue bonds that are well below 10%, why would people not want to use cheap money to do business? If you want to buy a house, and there is one that is going for 9%, of course you will take that rather than the one going for 14%. The government is beginning to show the way, that the cost of money should come down to single-digit yields.”

Foreign perspectives

New thinking is being brought into the retail sector by the introduction of international consultants with experience in developing markets. One of these is Sabre Capital, a company set up by Rana Talwa, the former head of Standard Chartered Bank. Sabre had earlier implemented the turnaround and rebranding of the Indian-based Centurion Bank. Mr Balogun expects Sabre will have the same impact at FCMB. “These are people who have done this time and time again in emerging markets. It is not that ambitious.”

FCMB’s introduction of direct selling techniques to the public through sales agents represents a major innovation for the local market. Mr Balogun stresses the importance of the retail culture and the need for bankers with specialist consumer and marketing expertise. He says: “The market opportunity is there, everyone sees it. But to get a merchant or commercial banker to execute a consumer banking strategy effectively is like putting a square peg in a round hole. It doesn’t fit.

“That doesn’t mean that banks won’t get it right in Nigeria, but those that don’t prepare carefully will take a lot longer and experience losses. Risk management for commercial and consumer banking businesses are very different. We have spent a great deal of time putting the building blocks in place. What is left is to capture the share of the market.”

Obstacles to growth

Pursuit of the consumer market is driving many Nigerian banks, but all lament the lack of legal and administrative infrastructure to underpin their investments. The country’s credit checking is of particular concern, and this holds back some local banks. A consumer credit bureau has long been under discussion by Nigerian government agencies but so far no secure structure has been created.

Jim Ovia, managing director of Zenith Bank, says his bank is constrained from expanding its retail presence by the absence of a national identity card scheme and a national consumer credit bureau. “The issue of identifying and being able to have a consistent track record for individuals is lacking because we don’t have a fully functional credit bureau that will have the database of each customer. A default noted on your credit record would provide a sanction for those that do not pay back debts.

“The government is working hard on developing a national identity card scheme and this will hopefully soon become operational. The credit bureau scheme will also become operational and this will use bio-metric data as unique DNA for individuals. When the scope for identity theft is removed, consumer lending will become more possible.”

First Inland Bank is also struggling with the problem of consumer credit, says managing director Akey Nwosu: “Growth is limited because we don’t have a credit bureau in place. We limit ourselves to people in safe jobs, people you can relate to, people working in civil service, banks, oil and the telecommunications industry.”

Pursuing debts is very time-consuming and erratic, says Mr Balogun. “You have to go through the courts to enforce your lien in the case of default and that can take time. You can get it, but it can take you nine months if you are unlucky. We still have a relatively inefficient system, although reforms are happening.

“You factor that into the structure and price of the loan. Only a very few can afford mortgages at the moment, but over the next two years a lot of those impediments will be reduced and prices will fall substantially. We expect to see exponential growth. Consumer banking is relatively new. You will see rapid growth over the next few years.”

The risk of bad debts should not deter banks from developing their retail presence, says Skye Bank’s managing director Akinsola Akinfamiwa. He advises a cautious approach, where the consequences of default are factored in to the assessment of opportunities and pricing.

Mr Akinfamiwa says: “You have to be highly selective in where you give loans. You will rely on where people work and character. But if the person stops paying you, you should know what [to] do with the asset.

“This approach has led us to develop our own secondary market in items like cars. It is also important to be involved in what you are doing and develop the entrepreneur’s skill in knowing what you do with the asset.”

Skye gained some formative information about consumer lending and customer selection from one of the legacy banks it acquired in the consolidation process. This bank was an aggressive lender to the property market and it has passed on some of the skills to its new parent.

Engaging with SMEs

The process of careful selection, control and monitoring is applied to lending to the small and medium-sized enterprises sector. Banks are required by government to lend to this sector, but managers find small entrepreneurs unreliable. Mr Akinfamiwa advises lenders to “understand what makes the businessman tick”.

This sanguine approach to consumer lending is shared by Barth Ebong, managing director at Union Bank, one of the country’s largest and longest established retail banks. He says: “If you run away from bad debt, the economy will never grow. You have to have provision for bad debt. The important thing is to reduce it to a minimum, so it doesn’t drag the bank down.

“Consumer banking is becoming a policy of the government. It is the only way to alleviate poverty and the only way to create the banking habit among the population. Union Bank has been doing this over the years and this is why we are a household name. Banking should not merely [offer] products but [should] also develop the people.”

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