Interview: Aigboje Aig-Imoukhuede, Bisi Onasanya, Segun Agbaje, Phillips Oduoza
To what extent do the new requirements for overseas recapitalisation impact foreign expansion strategies for Nigerian banks?
BISI ONASANYA: The Central Bank of Nigeria (CBN) had taken this initiative in response to changes in the regulatory environments in a number of African countries in which Nigerian banks have a presence, and where compliance with which may have adversely affected the capital adequacy ratios of the concerned banks. The apex bank was right to be concerned, however, the requirement has been fine-tuned to preclude the setting up of a new subsidiary in another country with reasonable capital requirements. Any foreign expansion is obviously a cost to the bank in question, but proper diligence on the target market should allow for quick wins that mollify this initial cost. The challenge for banks expanding outside of their comfort zones is to understand these costs and the term structure of the associated benefits, and to go for a least-cost approach.
AIGBOJE AIG-IMOUKHUEDE: The requirement which prohibits Nigerian banks from making additional investment in new or existing international subsidiaries will constrain their international expansion activities. It is however a necessary reaction from the CBN to the recent minimum capital increases demanded by some country regulators who seek to enhance and build the capacity of their domestic banking systems. Banks whose business plans do not justify increased capital will have to explore options such as dilution of existing shareholding, mergers and acquisition or outright exits from such countries to comply with new capital requirements. Ultimately, however, at this point in time international expansion has had limited impact on the domestic balance sheet of Nigerian banks.
PHILLIPS ODUOZA: According to McKinsey’s “Lions on the Move” report, Africa’s GDP is expected to reach $2.6trn in 2020, which is equivalent to the current size of the UK’s economy. This presents a key opportunity for Nigerian banks and ensures that those with the financial muscle to expand geographically will increasingly seek to do so. Just as an example, our balance sheet has benefitted significantly from our African expansion, as our African operations outside Nigeria now account for about 20% of our deposits. The new recapitalisation conditions will require banks to be more thorough in their due diligence when selecting countries to expand into, in addition to setting a higher financial hurdle which will help to ensure their returns are sustainable.
SEGUN AGBAJE: For top-tier Nigerian banks, expansion strategies remain central to long-term growth and profitability. Foreign expansion diversifies the bank’s portfolio and grows it by way of tapping into profitable foreign markets. Every region in which we want to play has its own specific regulatory demands. The effect of these regulator-led requirements such as that of recapitalisation will cause all banks to build and maintain a capital base capable of supporting the demands to play in international markets. The integrity of Nigerian banks globally is likely to benefit from reputational gains stemming from improved regulation, which is required for international recognition and increased credibility of the sector. Availability of funds to pursue short-term banking investments might be inhibited by the sinking of capital into the bank’s core base, but going into the long term the bank stands to benefit.
In what way are Basel II and Basel III requirements relevant for emerging markets like Nigeria?
AIG-IMOUKHUEDE: It has been quite challenging for emerging market banks to fully adopt the wide-ranging requirements of Basel II and Basel III. The adoption process entails changes to policies, processes, risk measurements, data collection and reporting platforms, as well as the acquisition of the necessary skills and capacity to implement and sustain these changes – which is also quite challenging. We began working towards Basel II compliance in 2008, for example, and it has taken up to 2013 to reach our destination.
However, Basel II and III requirements are relevant to all banking jurisdictions, including Nigeria. In addition, the Basel principles are designed for universal application, however, at times, implementation may negatively affect the growth and development of certain countries and markets. For instance, the Basel III policy requirement for capital computation of trade finance facilities would have had an adverse affect on trade finance in emerging markets. Fortunately these conditions were revised earlier in 2013.
ODUOZA: Given the impact of the global financial crisis on the international financial system, risk management systems of the banking industry need to be strengthened. As emerging markets seek greater connection to the global financial system, Basel II and Basel III requirements are becoming increasingly relevant in order for such markets to offer a sound and stable financial system to participants in other countries.
The big challenge in the implementation of Basel II involves the investments required in terms of information technology systems and infrastructure necessary to facilitate efficient data storage and retrieval for more accurate and timely enterprise wide-risk reporting. Data is often stored in silos in emerging market corporates, and this will have to be modified to meet the requirements. Basel II also requires the input of external credit assessment institutions in certain situations to provide independent assessment of risk, and therefore promotes objectivity and standardisation with regards to obligors and financial products. There is usually a lack of such rating agencies in many developing economies and this could provide challenges in implementation.
AGBAJE: While the requirements of the Basel Accords are challenging, and it will take time for banks to fully comply, the requirements for both Basel II and Basel III are based on standards aimed at governing banks globally. Indeed, major changes to processes and procedures, personnel training and management, risk management computation and capital provisions are determined by the Basel Accords. The Nigerian banking sector is already participating in international markets, thus compliance with Basel II and III is crucial. By doing so, the banks’ capital, risk management processes, capacity and reputation will be on par with other global institutions, thereby creating level grounds for competition.
ONASANYA: The domestic regulatory environment was always ahead of the Basel II curve. Whereas Basel II had required a minimum capital ratio of 8%, the CBN had a 10% minimum ratio. Thus, Basel II implementation and compliance in Nigeria was never much of a problem. However, industry circumstances globally now require that we reassess the role of bank regulation in the prevention of financial and economic crises.
Undoubtedly, a much more interdependent world calls for qualitatively different regulatory regimes. Basel III has responded to much of this challenge by jettisoning Basel II’s one-size-fits-all approach. Still, much of the regulatory challenge in our new global environment is a work in progress, to the extent that the deadline for the implementation of Basel III has been moved from 2015 to March 31, 2018. Global regulators are aware of the need for more time to address the realities.
How can other financial services providers encourage more consumer credit activity?
ODUOZA: The major factor which will lead to a significant jump in consumer credit is the use of biometrics in the identification of customers. This will help overcome current challenges, which had previously constrained banks from being very bullish in this area. The advent of credit bureaus in the country has been a positive development and combined with the use of biometrics will stimulate growth in consumer credit.
AGBAJE: Banks will benefit from the establishment of customer identification standards and consumer databases. If the CBN implements the use of biometrics in the banking sector, extending customer credit will occur on a more secure basis. Improvements to the macro-economy, such as employment, growth and development of various sectors’ activity, plus government investment in job creation, will also help foster an increase in the share of total credit held by consumers.
ONASANYA: To the extent that they have closer relationships with would-be clients, other financial institutions have been driving consumer credit activity, especially in the informal sector. The problem has been that in the informal sector, at least, scale issues have driven up costs of providing these services.
AIG-IMOUKHUEDE: Aside from an efficient identity management system and functioning credit bureaus, improved economic conditions are the most sustainable drivers of a healthy consumer credit sector.
What can be done to increase the proportion of long-term deposits held by Nigerian banks?
AGBAJE: The proportion of long-term deposits to the industry’s total deposits can be increased in several ways, including steady monetary policies to boost the stability and reputation of the banking industry; the development of long-tenor products by banks; development of the mortgage, insurance and pension segments, which are typically long-term investors; and a prevalence of market-determined rates on long-term deposits.
ONASANYA: Proper liquidity management ought to involve banks having access to long-dated funds that they may deploy via syndication. However, a more effective strategy to exploit long-term funds should aim at pushing these through the bond markets. Nonetheless, the most recent reforms to pension services are indicative of the possible course of long-term deposits. Pension fund administrators and custodians have helped drive a noticeable rise in patient capital held with banks. Reforms to the health care infrastructure, such as the establishment of health management organisations, or reforms to the education system that increase the portion of tuition paid for through student loans, may have a similar effect on the pension system reform in the growth of long-term bank deposits.
AIG-IMOUKHUEDE: The maturity profile of Nigerian banks has historically been skewed towards short-term deposits, with a significant proportion of deposits with contractual maturities of 90 days or less. The causative factors are both customer and bank related. Frequent changes in monetary policy, and the high rate of bank failure which characterised Nigeria’s financial system in the 1990s, conditioned the average depositor to maintain deposits with banks for short contractual periods. In tandem, banks also shied away from creating and marketing long-term deposit products.
However, a combination of factors including improved stability in monetary policy, availability of market determined pricing benchmarks and greater risk awareness of banks are leading to the emergence of longer-term deposits on the books of Nigerian banks.
ODUOZA: Continued development of the non-banking financial sector is key to increasing long-term deposits. Greater penetration of pension funds, which stood at N3.5trn ($22.05bn) in June 2013, serves as a major pool of long-term funds for banks. Implementation of reforms in the mortgage and the insurance sectors will also assist in this regard. In addition, the utilisation of intervention funds by the government to further the development of critical aspects of the economy is also key to increasing the overall proportion.
How important will physical branch expansion be for the growth of retail banking penetration?
AIG-IMOUKHUEDE: Physical branches will continue to play a key role in the customer-bank relationship. However, the functions of brick and mortar branches are changing in line with changing consumer preferences and market dynamics. Branches will become hubs for cross-selling of financial products, such as insurance and pensions, and will migrate from cash-processing centres to locations for the fulfilment of value-added services such as financial and lifestyle planning.
AGBAJE: The market dynamic for retail banking is constantly advancing. With new developments in technology and the ready availability of these improvements on the market, retail banking products and services will thrive on the basis of both technological and mobile improvements meeting the lifestyles of consumers. We would expect the need for traditional banking halls to diminish in terms of over-the-counter cash and cash-like transactions, which will move onto e-platforms. Branches will, however, retain other banking advisory services. Therefore physical branch expansion as a means of capturing the retail market will diminish, giving room for other banking products and services.
ODUOZA: While branch expansion will not grow as fast as other electronic channels such as automated teller machines (ATMs), branches will remain a key channel for banks to serve their customers. However, the role of the branch will be less transactional and more advisory in nature. Customers will increasingly use branches for financial advice, while counter transactions will migrate to electronic channels.
ONASANYA: Alternative channels mean lower costs, but they also require new competences, especially the security ecosystem that protects customers at the cash dispensing locations and ensures that they remain supplied with funds all day long. This has restricted deployment of the ATMs to locations in which they have an existing branch. The challenge going forward will be to alter the value proposition of new branch deployment. The small form branch model is likely to become the more dominant, not just as is it cheaper and faster to deploy, but because it is also more modular, allowing banks to respond to changes in a fickle market space.
How would you rate the progress of the cash-lite initiative thus far?
ONASANYA: Lagos sees the bulk of domestic financial activities in the country (and much of its cash-based transactions). However, the extension of the cashless policy beyond Lagos State to six other states and the Federal Capital Territory, Abuja, is significant in that these new locations together account for 19.51% of the total population, which combined represents more than 50% of domestic trading activities. Electronic and card transactions in Lagos are now about 20% of financial transactions. Invariably, all the banks in the country have robust internet-based service offerings, including point-of-sale (POS) terminals and ATMs.
ODUOZA: The cash-lite initiative offers tremendous benefits for Nigeria. It enables the CBN to better manage monetary policy by ensuring funds stay within the banking system, as well as allows banks to become more efficient by reducing the number of cash-intensive operations they undertake. This will provide banks with significant cost savings, which can then be passed on to customers. Improving the quality and reliability of telecommunications infrastructure in the country is the critical success factor for this initiative. It will lead to greater availability and reliability of POS devices, in addition to the acceptability of mobile banking.
AIG-IMOUKHUEDE: In the long term, this initiative will alter the culture of banking in Nigeria. In the near term, POS devices hold the greatest promise for the more extensive rollout of the Cash-lite policy, and significant investments are being made by banks and other third parties to build the needed infrastructure. Also, there has been a notable improvement in communications reliability, especially with the introduction of code division multiple access options, in addition to general packet radio services-based channels. Over time, we expect mobile banking to gain wider acceptance as a primary payment channel, but there is still some way to go to overcome the cultural barriers and establish the required infrastructure.
AGBAJE: There has been tremendous success made in the roll-out of the CBN’s cash-lite in policy in Lagos State. Since the start of the initiative, the modes of transactions have increasingly moved to e-channels, especially mobile banking and POS terminals. This has spurred banks to create innovative ways of offering mobile banking services and others alike. The feasibility of this initiative nation-wide relies largely on the success of telecommunications penetration into less affluent regions. Mobile banking solutions are getting simpler and more user-friendly for the public, thereby ensuring success – as in the case of the M-PESA in Kenya.
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