With 84% of money in circulation outside the banking system, banks have little impact on Nigeria’s population, providing few consumer retail services and virtually no consumer lending.

The streets of Lagos, Nigeria’s commercial capital, are covered with billboards promoting the brands of the country’s 25 banks. It gives the appearance of intense competition. Yet when it comes to consumer retail banking, appearances are deceptive.

Nigeria’s banking industry has remarkably little exposure to the man on the street. Less than 10% of the lending by even the largest retail banks is to individuals. The consumer base is mostly seen as ground to rake for cash that can then be lent to multinationals and large corporates.

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“Our preference is that the branches are for gathering deposits, transferring the money to head office, and letting head office decide how to make the best use of the funds as opposed to trying to get the branches to do lots of retail lending,” says Atedo Peterside, CEO of IBTC Chartered Bank, an investment bank that acquired a retail capacity during the industry’s consolidation in the past 18 months.

Underserved market

Standard retail products such as mortgages and asset financing, and even overdrafts, are almost unheard of. The billboards aim only to convince savers that the banks are safe homes for their money. “It’s certainly an underserved market; we don’t have any retail lending whatsoever,” says Ike Chioke, head of corporate finance at London-based and Nigeria-based Afrinvest.

There are many reasons for the lack of development of a consumer lending market. For one, “you can’t recover your security”, says Erastus Akingbola, CEO of Intercontinental Bank, one of the larger banks.

Identifying customers is notoriously difficult, says Mr Peterside. Individuals can get a passport on one day and get another, with a different name, the next, he says. A national identity scheme became bogged down in corruption and scandal. There is no credit bureau in Nigeria so banks have no way of checking credit history. Serial loan defaulters can switch banks with the new bank unaware of past defaults.

The cumbersome court process makes it difficult to recover security – cases can drag on for 10 years, during which banks cannot claim interest. A 19th-century law allows consumers to apply to courts for debt forgiveness on the basis of financial hardship, which is all too easily granted. Although land tenure is generally sound in Nigeria, there is no central land registry, making it difficult to be certain that a customer owns the property they say they do. One of the more brazen scams to contribute to Nigeria’s reputation for corruption is fraudsters selling property they do not own to unsuspecting buyers. Mortgages are difficult to register because each requires consent of the relevant state governor, which can take 18 months to obtain. The postal system is fragile and based mostly on post boxes, another challenge for retail.

The retail landscape

Despite all the problems, the banks say that default rates from retail customers are lower than commercial books, ranging from 5% to less than 1%. The statistics, though, reflect a tiny base of retail lending made to individuals working at large multinationals or the public sector. Intercontinental does lending in partnership with public sector and corporate client’s human resources departments, overcoming the ‘know your client’ problems. Some corporate clients allow payroll deductions for loan recovery, treating the availability of loans as an added employee service. Other lending is to clients with a long history of stable employment and a salary paid directly into an account. Most of the loans are for vehicles or white goods on terms of up to three years. The few mortgages that are arranged (to the bluest chip clients) are on terms of up to five years.

A further disincentive to retail lending is an effective cap on interest rates. A ‘gentleman’s agreement’ has been struck with the government (read: political pressure) to not charge more than four percentage points above the minimum rediscount rate – the main monetary policy rate – which is currently 13%. Banks skirt this price cap by loading on fees (however, a formal system of interest rate caps is likely). One banker puts the effective cost of borrowing by consumers at 30% but, with inflation at about 12%, that is still cheap relative to the risks. Banks’ cost of funds ranges from 5% to 12% with non-performing loans as high as 35% on the worst books.

Transactional facilities are minimal, too. A local switching company owned by some of the banks allows card holders to use other banks’ ATMs for a small fee. Most banks offer internet and telephone banking – a major development of the past few years – which allows account management and some bill payments. A few of the larger banks offer Mastercard debit cards, a new arrival in Nigeria, although take-up has been slow. Mastercard-carrying clients have had trouble getting them accepted outside the country (Nigeria’s reputation for graft means foreign retailers are sceptical at the sight of a Nigerian debit card). Visa is also working to license local banks but credit card acceptance is limited. Only 30 sites across Nigeria accept Visa cards (hotels catering to international travellers) and those are managed by Barclays from Ghana.

Search for growth

Yet the government has explicitly declared consumer banking to be a development that it wants to see in the industry. Mass consumer lending has an obvious growth impact by stimulating domestic demand and the government is firmly committed to driving growth.

The Central Bank of Nigeria (CBN) believes that the new look industry will improve its retail business. With the industry now highly capitalised and more competitive in corporate business, consumer asset creation is an obvious way for banks to chase the returns to which they have been accustomed. The industry’s return on invested capital, according to Afrinvest, averaged 38% before the consolidation process. With the massive increase in capital, the CBN calculates that banks will need an extra $73m in profits to maintain returns.

And it is not just consumer asset creation that could benefit: relatively few Nigerians have a bank account. Standardised figures for the industry do not exist and the claims of individual banks add up to more than aggregate totals for the industry. Being big is seen as a critical success factor and most banks have a penchant for exaggeration. About five million Nigerians have bank accounts. That makes the economy cash-flush and blunts the monetary transmission mechanism – according to the CBN, 84% of the money in circulation is outside of the banking system. Most Nigerians prefer to keep their cash under the mattress, despite the masses of low denomination banknotes that implies.

Gavin Young, Nigerian country director of Visa, estimates that about 16 million Nigerians qualify for accounts in terms of income and that this will rise to 26 million in the next few years, which is still a low penetration in a country of 138 million people.

Wake up call

With the consolidation having created what are locally termed ‘megabanks’, almost all banks now realise that the consumer market has to be a source of assets and not just deposits. Some are embracing the challenge. “Banks have to be innovative. The only way to go is the way of other countries in the world: mortgage finance and consumer finance to boost the level of people’s leverage,” says Yinka Adelekan, an analyst at local research and credit ratings agency Agusto & Co. Agusto has forecast that consumer banking will be the main growth area for bank assets in the year ahead. It argues that, with the right innovation, banks can get around the legal and infrastructural barriers to retail lending.

“It goes without saying that anyone who is going to survive the next five years will get into consumer banking,” says Remi Babalola, executive director of retail banking at First Bank, the biggest retail bank in Nigeria. First Bank has created a lending product in the mould of a buy and lease-back product for white goods and other assets. Because the bank holds title over the goods, most of the legal problems in recovering assets are side-stepped. First has made loans of about $12m to consumers out of a total lending book of $140m.

Another large retail bank, Oceanic, has become the first bank in Nigeria to launch a standardised overdraft account that gives clients an overdraft equivalent to 50% of their monthly salary.

“The truth of the matter is that, when it comes to consumer retail type of business in Nigeria, Nigerian banks don’t have a clue. Most Nigerian bankers have grown up in a wholesale type of environment,” says Aigboje Aig-Imoukhuede, MD of Access Bank, an aggressive young corporate bank with designs on the retail sector.

Three ING retail specialists have been seconded to the bank under a business assistance agreement to help it to set up its systems for the retail market. “One key issue for most Nigerian banks is that to run a card business from an operational and credit risk perspective that is managed manually or in a semi-automated fashion is ridiculously expensive. So Nigerian banks are not going to give credit to anybody if the cost of administering a N60,000 [$460] limit is having one person looking at the account and saying yes or no [to transactions],” says Mr Aig-Imoukhuede. “The idea is to strip your systems, create straight-through processing, let the channels talk to the main database, let the main database integrate with your credit systems. Then you can do consumer credit.”

Access Bank will be ready to roll out card-based accounts with overdrafts in June.

Competitive edge

As some banks make tentative steps into retail lending, the pressure will grow on others to do the same, if only to protect their deposit bases. Every bank has its own story on the investments that it is piling into systems, branches, ATMs and new products. Young competitive banks, such as Zenith, GT Bank, Oceanic and Access, are using the industry restructuring as an opportunity to overhaul their systems. With better online systems, a service culture is also expected to become a competitive edge for the banks – currently, being a consumer account holder does not earn anyone much respect in their local branch.

The banks are also building new branches (there are 3300 in the industry now) while eliminating overlap resulting from acquisitions and installing more ATMs. Mastercard and Visa are bringing transactional technology to the industry to build a non-cash spending culture. Even the legal and infrastructural environment has been identified by the government and the CBN as an impediment to their own vision for the industry. Lagos State has introduced a commercial court system that makes dealing with recovery of security easier. The CBN now operates a rudimentary credit monitoring system, keeping a blacklist of serial, large defaulters. The banks are working together to create a formal credit bureau.

With more pressure to build profitability, Nigerians will turn their entrepreneurial instincts to developing the retail market.

Atedo Peterside: ‘Branches are for gathering deposits, transferring the money to head office’

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