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AfricaApril 1 2007

Taking the initiative

Chukwuma Soludo, governor of the Central Bank of Nigeria, tells James Eedes of a bold plan to raise $1bn for his brainchild – the Africa Financing Corporation.
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One thing you would not accuse Chukwuma Soludo of is lacking momentum. The governor of the Central Bank of Nigeria (CBN) has energetically stuck to his economic reform agenda when others in government and the private sector have retreated to the sidelines ahead of the country’s April 21 election.

Most recently, Mr Soludo was in London and New York drumming up interest in his latest brainchild, the Africa Finance Corporation (AFC). In characteristically bullish manner, the governor was seeking seed capital for the institution from international investors despite there being no management team in place.

It would not be the first time Mr Soludo has confounded the sceptics – the governor famously overcame staunch resistance to his plan to restructure the Nigerian banking sector, despite serious doubts he would meet his own unlikely 18-month deadline. Ahead of elections in which no-one is betting on a winner, there are few who do not worry what the outcome holds for the country and the momentum of reform.

Speaking to The Banker in London, Mr Soludo dismisses such fears, insisting the direction of reform will not change. “The economy has the capacity to sustain growth of more than 10% in the medium term,” he says, citing Nigeria’s improving business environment, abundant natural resources, large tracts of uncultivated agricultural land, and the increasing interest in the country being shown by the estimated 17 million Nigerians living abroad.

Authorities estimate the economy grew at 5.6% in 2006. Although slower than the year before, the underlying structure of growth is healthy: oil sector output shrank by 4.7%, owing to unrest in the important oil producing Niger Delta, but the non-oil sectors grew by 8.9%.

With steady improvement in a number of performance indicators, Mr Soludo also expects an upgrade to the country’s sovereign debt ratio, currently rated BB- by Standard & Poors and Fitch.

Mr Soludo is looking to raise at least $1bn in equity to establish the AFC, a target that is being underwritten by the CBN. Already Nigerian banks have committed investment of more than $700m when the private placement was launched last month in Nigeria.

Development funding

The AFC is being billed as a private sector-owned and led regional investment bank. The business rationale for the proposed institution is the need to bridge the massive gap in funding required for the development of key economic sectors, in the process creating significant returns to investors. Its mission statement is “to be the leading international securities firm and investment bank in Africa with its leadership position defined by international investment grade rating, track record of profitability and delivery of positive returns to shareholders.”

It is envisaged the AFC will be owned by commercial banks in Africa, other institutional investors and African central banks, with a minimum of 51% of ownership held by the private sector. Within five years, the institution will be listed on one or more international stock exchange, including various regional exchanges within Africa.

Funding will be raised by means of international issuance and access to various credit lines. Significantly, legislation has been drafted to allow the CBN to make available up to 5% of the country’s external reserves – which presently equates to about $2.2bn – for lending through the AFC.

According to Mr Soludo, the AFC “will be viewed [much like] international organisations such as the International Finance Corporation, African Development Bank and South Africa’s Industrial Development Corporation”. He notes too that the institution will obtain diplomatic privileges and legal immunities such as those enjoyed by multilateral financial institutions such as the World Bank, avoiding what he describes as “tedious market entry formalities and regulatory requirements” such as application for a banking licence and listing requirements. Furthermore, the AFC will be tax-exempt at the corporate level.

It is a bold initiative, but it has raised eyebrows. In addition to launching the private offer without a management team or even a named CEO, Mr Soludo is promising a 21% return on equity by the AFC’s fifth year, a net interest margin of 48% and a profit margin of 41% – impressive performance even by international standards.

Notwithstanding obvious question marks about according a private sector-owned institution anti-competitive advantages – tax exemption, legal immunities and so forth – the AFC looks suspiciously less like a regional African investment bank and very much like a Nigerian institution, headquartered in Nigeria, underwritten by the CBN, majority-owned by Nigerian banks and probably listed on the Nigerian Stock Exchange.

Indeed, during the London road show, Mr Soludo was more inclined to talk about the exciting economic prospects in Nigeria than the rest of Africa.

Is this an elaborate ploy to give unfair advantage to Nigerian investors? Or is it a visionary intervention to mobilise the capital and expertise to make these investments in Africa, even if there is a concentration of projects in Nigeria?

Mr Soludo contends that the financing gap runs into the tens of billions of dollars, which is a clear signal that economic development needs are going unmet. Africa’s indigenous private sector investment banks mostly lack the size and, in the case of the large South African banks, the geographic coverage to effectively service the market. Left alone to market forces, it is doubtful strong, pan-African institutions would have emerged. Considering its size and economic significance (and potential), Nigeria in particular is conspicuous for its lack of muscular domestic investment banks with the necessary resources; the AFC is the consolidation of such resources under one roof.

In some ways, Mr Soludo’s widely hailed restructuring of Nigeria’s banking sector was a similarly crude intervention. However, it has proved undoubtedly successful. The 25 banks trimmed from 89 are larger and stronger and are already showing signs of playing a far more meaningful intermediary role in economic development.

“We have 25 strong and reliable banks, without one single unsound or questionable bank. It is the soundest the sector has ever been,” says Mr Soludo. “On a combined basis, these 25 banks are now the size of the first and second largest banks in South Africa. In contrast, the combined size of the 89 banks in 2003 was equivalent to the fourth largest bank in South Africa. Twenty of the 25 Nigerian banks are among the top 100 banks in Africa; 17 are in the top 40 and four are in the top 10. Whereas in 2003 Nigeria did not have a single bank among the top 1000 world banks, we now have 17.

“Growth in assets, deposits, credit and profitability since 2004 has been astounding. Performance on capital adequacy and liquidity ratios has been good and the size of non-performing loan ratios has declined significantly,” he says.

According to CBN figures, the asset base of the banking system increased 104% from N3209bn ($25bn) in June 2004 to N6555bn at end-September 2006. Capital and reserves were up 192% over the same time period to N957bn, compared with N327bn, and the industry capital adequacy ratio stood at 21.6%. Importantly, the ratio of non-performing loans was down to 9.5%, compared with 19.8% in June 2004.

Inflation busting

While Mr Soludo has gained many fans for his no-nonsense approach to reform, he is now under increasing scrutiny to see whether he can keep the Nigerian economy on an even keel. Aided by more prudent management of public expenditure, in particular cutting spending of windfall oil revenue, Nigerian inflation has slowed from high double digits to about 8%. Many argue this was the easy bit; keeping the brakes on inflation in a fast-growing economy – without jeopardising growth – will be tougher.

To this end, Mr Soludo promises “aggressive liquidity management” to counter this year’s expansionary budget, in which spending is up 21% on last year. The central bank’s monetary policy committee is likely to meet before the April elections, but Mr Soludo would not be drawn on rate movements, saying only that the bank was vigilant in countering increases in cash floating around in the economy.

His job is every bit as much about managing inflationary expectations. He is quick to point out that a potential injection of an additional $4bn in oil savings cash into the economy would be non-inflationary as they would merely fill the gap created by revenue shortfalls from oil production dropping under the 2.5 million barrels-per-day level forecast in the budget.

Investor concern

Foreign investors had applauded the 2007 budget for its prudence but now worry that a large disbursement from the excess crude oil account indicates that government is prepared to open the spending spigot ahead of elections. The excess crude oil account is savings from oil revenues above the budgeted price of $40 a barrel.

“It is not going to stoke inflation any higher than the budgeted framework,” Mr Soludo reiterates, adding: “All I’m saying is that [present] spending is only taking it up to that level. So it is not having any greater impact than the budget itself would have had.”

Asked if he thinks the government will overspend ahead of the election, Soludo replies: “No, I don’t think the government will go beyond that limit. So what is being proposed is still consistent within that particular framework, within that ceiling. So it is nothing above that. No new money.”

That said, whatever Mr Soludo’s worries ahead of elections, they may prove modest compared with difficulties managing the boom that would follow peaceful elections. If Nigeria’s reform plan remains intact, it is likely there will be a surge in investment which will need to be managed.

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