Bringing Vision into View

Blots on the financial landscape determine credit tendencies and savings, including insurance penetration. And at the corporate level, they affect the capital markets, where prevailing high interest rates and absent […]

Blots on the financial landscape determine credit tendencies and savings, including insurance penetration. And at the corporate level, they affect the capital markets, where prevailing high interest rates and absent IPOs curb liquidity and the capital generation required for commercial growth. The economy entered into a recession for the first time in over two decades in 2016, where shocks included weak oil pricing and local security issues. Yet, the unbanked majority, exacerbated by sticky unemployment, promises massive growth potential under more amenable circumstances. This potential is being probed by the would-be panacea of fintech and the leveraging of mobile technology.

Reputation, Reputation, Reputation

Nigerians cringe at the proverbial “prince struggling to withdraw vast wealth and keen to share it in exchange for your bank details.“ This unfortunate reputation casts a long shadow over the financial system, dominated by banking. The Egmont Group, comprising over 150 financial intelligence units (FIUs), and a global benchmark of financial integrity, in July 2017 suspended the Nigeria Financial Intelligence Unit (NIFU) for Nigeria’s failure to grant it operational autonomy. It was given until YE2017 to rectify legislative shortcomings or risk expulsion. A member since 2007, suspension was no hollow gesture, preventing local banks from correspondent banking with foreign institutions and denying Nigerians foreign credit cards. Nigeria also seeks membership of the Financial Action Task Force (FATF), which the suspension jeopardizes.
The Banks
Once bloated, today’s banking sector numbers 25 institutions, which, combined, have the same size as the first and second-largest banks of South Africa. This starkly contrasts with all 89 banks combined in 2003, pre-consolidation, being of equal size to South Africa’s fourth-largest bank. Furthermore, 20 Nigerian banks had scaled the leading 100 banks in Africa, ranking, too, among the top-1,000 banks in the world by end-2006 from zero three years earlier.

Banks’ financial performance has been reflected in monetary policy and CBN steps to boost private capital flows, and to shore-up the battered naira and external reserves, raising policy and market interest rates. Higher fixed-income yields bolstered their interest income. Yet, the June 2016 devaluation dented their capital adequacy level with the northbound revaluation of FX-denominated, risk-weighted assets, while prudential stipulations eased. Total deposits rose 19.3% in 2016, having shed 1.8% a year earlier, while total assets and total liabilities grew 20.7% and 21.8%, respectively. The IMF notes that the 2014 oil price slump notably bruised Nigeria’s banks, suggesting a possible second round of recapitalization, with sector non-performing loans (NPLs) as high as 15%. Back in 2005 the sector’s minimum capital base had been lifted to NGN25 billion. Critics say this will only pressure banks, already hard pressed to fund long-term investments. Indeed, history shows that the sector periodically succumbs to natural selection. After the 1998 oil price wobble 28 banks closed, followed in 2009 by a further 10. Industry data indicates that close to 50% of total impaired loans are held by the top-five banks, namely Zenith Bank, Guaranty Trust Bank, First Bank Nigeria, United Bank for Africa, and Access Bank. Tellingly, of the total, 37% and 11%, respectively, were in the oil & gas and transport & communication sectors. The five account for around 60% of loans to the oil sector, spelling high concentration risk. Yet sector resilience is evidenced in the wake of the August 2015 stipulation that all government revenues thus far placed with commercial banks be transferred to a Treasury Single Account (TSA) at the CBN. Despite an immediate liquidity loss of over NGN3 trillion (approx. 10%) from collective balance sheets, the banking system remains intact.

The One-percenters

Industry numbers as of 2015 indicate overall assets under management in Africa of USD273 billion, with 85% deriving from South African insurers alone. And given that, globally, 65% of insurance premiums written stem from G7 nations, which account for just 10% of the world’s population, it is no stretch to conclude that Nigeria’s insurance sector is virtually unpenetrated at 1%. Meanwhile, according to the National Pension Commission (PenCom), as of 3Q2017 total pension assets were at USD23.5 billion, with Retirement Savings Accounts (RSA) claiming 67.6% of total assets. Of the 7.7 million active members, 70.8% were aged below 40. Yet, despite Nigeria’s pension industry CAGR of 19% over the past five years, this is among a labor force of 72.9 million, whereby just 9.5% of potential members expect a pension. Factoring in an optimistic unemployment rate of 14.2% points to just 12.3% of the working population. Essentially, a potential NGN5.4 trillion in pension assets is being lost.

National Financial Inclusion Strategy, Fintech, and e-solutions

Brevity insists we consider fintech and inclusion together, given their interdependence. PwC’s Nigeria FinTech Survey 2017 puts global fintech investment by 2020 at around USD150 billion. Between 2014 and 2016 fintech in Africa is estimated to have grown by a CAGR of over 58% to USD800 million and could exceed USD3 billion by 2020, with Nigeria high among the uptake. This uptake, in fact, is assessed in terms of its capacity to “disrupt“ the existing financial services sector from banking to insurance.
And yet for now, the vast majority of Nigerians are unbanked, with just 29 million adults (32.5% of the adult population) holding an account. Conflict has disproportionately punished northern Nigeria, where 68% of adults are excluded. National Financial Inclusion Strategy targets include 40% credit penetration, benchmarking the penetration levels of South Africa (32%) and Uganda (37%). This demands 40% CAGR between 2011 and 2020 and entails the 1.5 million borrowers of 2010 rising to 42 million by 2020. NGN16 trillion in credit was alloted to the private sector in 1Q2017, where services and industry received NGN9.25 trillion and NGN6.19 trillion, respectively. The inclusion strategy also aims to boost inclusion within the formal economic sector from 36.3% in 2010 to 70% by 2020. In the interim, e-banking is redrawing the traditional landscape as convenient and secure digital services mitigate the limitations of brick-and-mortar networks. Early adopters stand to reap savings and leverage scale. PwC’s survey suggests that the local retail banking and payments sectors will face greatest disruption by fintech solutions as related companies target the value chain. The state tackled financial data integrity back in 2014 when the CBN launched the centralized biometric identification system’s Bank Verification Number (BVN). A 2016 circular mandated banks to embed biometric data related to customers’ BVNs to better secure offline biometric-based identification during payments. Sector research points to an additional 1.4 billion mobile subscriptions by 2020 globally. Nigeria’s rising mobile penetration is evidenced in its 25 million smartphone owners and 150 million active subscriber lines. In 1Q2016, 14.1 million transactions were made on the mobile platform amounting to NGN135.2 billion. By 1Q2017, 12.6 million transactions had reached NGN260.6 billion. The CBN has also issued over 20 licenses to mobile payment operators.

The Capital Markets

Nigerian Stock Exchange (NSE) CEO, Oscar Onyema, notes almost 400 million shares are traded per day, with a little over NGN4 billion in the equity market, and with notable activity, in the primary market, driven by fixed income in a high interest rate climate.
IPOs are conspicuously absent, although firms in the unrepresented telco sector, and the oil sector, have the potential to seriously boost bourse MCap from its approximate NGN9 trillion level. The rights issue path is more trodden. Seven listed companies have opted to raise NGN191 billion before end-2017 (Guinness Nigeria Plc. NGN39.7 billion, Forte Oil NGN20 billion, UACN Plc. NGN15.4 billion, Union Bank Plc. NGN50 billion, Unilever Nigeria Plc. NGN63 billion, and May & Baker Nigeria Plc NGN3 billion). From the fintech front, Johnson Chukwu, Founder and CEO of Cowry Asset Management, told TBY that the firm had “plugged a huge service gap in investment banking (by providing) online placement of orders (which) has eventually become an industry standard.“

The NSE benchmark all shares index (ASI) peaked historically at 43,031.83 in July 2014 and troughed at 19,785.03 in December 2011. Bearish sentiment in 2016 saw a 6.17% decline compound the 17.36% slump of 2015. 3Q2017 brought a 6.82% quarterly rise and close of 35,439 from 33,177 in 2Q2017. MCap climbed 6.7% QoQ to NGN12.217 trillion. The financial sector rules the trading roost, yielding over 80% of the share volume traded in 3Q2017, over 57% of total deals and 45% of total value. Meanwhile, the bond market printed quarterly trading of 71,330 units of government bonds valued at NGN69.24 million in 114 deals compared to 64,098 units valued at NGN106.5 million in 288 deals a quarter earlier. Onyema insists that the exchange needs diversity to boost scope and scale. “We need strong risk management tools (…) and the exchange has been working to introduce exchange-traded derivatives (…) a tool to drive economic development.“
A plethora of obstacles, then, hamstring financial services sector potential. Furthermore, Nigeria must continue demonstrating commitment to transparency, as vital to the sector economy as uninterrupted power supply.

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