Interview: Peter Amangbo, Uzoma Dozie, Herbert Wigwe, Adesola Adeduntan
Does the macroeconomic climate present a risk of higher non-performing loans?
PETER AMANGBO: The challenging macroeconomic climate presents a medium level of risk in terms of higher levels of non-performing loans. It is important to note this is not the first time Nigeria’s economy has gone through a difficult spell, and the banking industry must prepare adequately to manage this risk. A major threat to the economy is the limited supply of foreign currency. This risk varies on a business-to-business basis, as many firms are not import dependent and to some extent may not be affected by the limited supply. If a firm is an industry leader or earns foreign currency, then this risk can be largely mitigated, but for those that do not check these boxes, alternative ways must be found to adjust to the environment.
From the banking industry’s perspective, we must continuously review each customer individually and examine how they can liquidate their foreign obligations as quickly as possible.
HERBERT WIGWE: Today’s economic conditions will create pressure on many banks’ balance sheets. Nigeria relies on oil exports for the majority of its foreign currency inflows. Oil sales also impact the level of the Central Bank of Nigeria’s (CBN’s) reserves, which in turn determine the amount of imports Nigeria can substitute.
When Nigeria was part of JP Morgan’s investment index, there were greater inflows of foreign investments, and though the supply of hard currency has dried up, demand remains high. Manufacturers reliant on imported raw materials for production will be hard pressed by the shortage of foreign currency. A second consideration is the banking sector’s exposure to the oil and gas sector. Some loans may have to be restructured; perhaps a loan that would have taken four years to repay will now take eight years. There is also still uncertainty about where the price of oil will ultimately settle. Despite the challenging climate, regulators have intervened quickly, and banks have been proactive in their preparations.
Compared to the 2008 financial crisis, Nigerian banks now have a far greater awareness of market risks, currency risks and reputational risks. The Basel I and II reforms have also ensured safer levels of capital adequacy to cover various risks.
UZOMA DOZIE: The current challenges increase the chances for non-performing loans to materialise, especially if a downturn lasts longer than two quarters. Depleting cash flows mean that principle interests are not being paid, and the value of collateral is decreasing. We have seen this happen in the construction sector, as many firms are owed large sums by the government. These companies will eventually get paid their dues, but the question of when remains uncertain.
As banks have a 12-month reporting cycle, debts that will be paid in one to three years do not help the current situation and add to the possibility of more non-performing loans. A challenge in the past few years has been for the government to efficiently release money for projects.
This bottleneck has been addressed by the Treasury Single Account, which allows quicker deployment of public funds. More broadly, the minister of finance, Kemi Adeosun, is trying to close all public sector leakages. If the government can show that all public agencies that generate income are paying into the federal account, the administration will have more funds and credibility.
ADESOLA ADEDUNTAN: There is a strong correlation between an economic slowdown and higher rates of NPLs in the banking sector. For the better part of 2015, access to foreign exchange (FX) was quite limited, though in mid-2016 the Central Bank of Nigeria liberalised the FX market, which devalued the naira significantly. An implication of this development is that there will be businesses that will struggle to absorb the increase in the cost of production. Many firms simply cannot pass on higher costs to their end consumer, and these are the entities likely to struggle servicing their loans. The impact of these dynamics on Nigeria’s banks depends on the nature of a given bank’s clients. Certain firms deal mainly with top-notch corporates and are unlikely to feel too much of an impact. Others, like First Bank, have customers across the business spectrum, and will have some customers that are deeply impacted by the economic downturn and others that are not. Another consideration is the risk philosophy of banks, as many are tightening their risk acceptance criteria. Customer selection will become increasingly important. However, when banks tighten their lending, well-structured businesses are also affected as access to credit becomes constrained.
How can financial access be increased for small and medium-sized enterprises (SMEs)?
DOZIE: There are a number of factors that must be considered when supporting SMEs, such as access to finance, access to market and access to advisory services, particularly on capacity building. On the finance end, the central bank has a large fund that is dedicated to SMEs, and local banks often collaborate with multi-lateral institutions to provide favourable interest rates. Many SMEs tell us their chief concern is access to market. For example, poor infrastructure prevents countless agriculture companies from tapping into larger markets in different areas of the country.
On the capacity building front, banks must play an active role in raising standards for SMEs and should encourage them to adopt more technology that improves the efficiency of their operations.
AMANGBO: There is no doubt that SMEs are the engine of growth and employment for the economy. For banks, however, lending to smaller firms can be challenging. Financial literacy is an important consideration for SMEs seeking access to capital, and if companies cannot translate their passion into a coherent business strategy, then banks will be reluctant to lend to them. Many SMEs lack proper internal structures and records of accounts. There is a need for more advisers to help with these issues.
To improve SME access to finance, the CBN has created the National Collateral Registry, which allows SMEs to register moveable assets. For example, if you register your vehicle with the database, it becomes legitimate collateral, making it easier to obtain bank loans.
ADEDUNTAN: First Bank is the largest lender to SMEs in Nigeria and believes that improving their access to finance is critical to the economy. Education around SMEs is key. People must realise that when working for an entrepreneur or SME, it is about turning a passion into a functioning business. For an entrepreneur at the onset, the level of financial reward they should expect to earn may not be comparable to an individual in paid employment, but in the fullness of time they will reap the reward of their equity investment.
WIGWE: It is important to first note that SMEs are important to the economy and that many of tomorrow’s large companies start out as SMEs. That said, commercial banks must be careful in lending to SMEs, as irrespective of the amount of information you have on them, the fundamentals of the business must be strong for a bank to offer credit. One strategy for large banks has been to work with SMEs that are part of a larger value-chain of the economy, such as the telecoms industry. The cash flow of these types of companies is often more predictable and resilient. SMEs in Nigeria are typically run by women, and it is important for organisations to support these enterprises. Training on capacity building, financial statements and financial literacy can all help SME owners.
What can be done to encourage individuals and vendors to embrace cashless activity?
AMANGBO: The potential for e-banking and e-commerce activities in Nigeria is massive. With close to 130m telephone lines, telephone density in Nigeria is strong, which portends significant opportunities for mobile banking. Using technology is the quickest and easiest way to reach out to the unbanked population and to those in rural areas. There are very few parts of the country where you cannot use a mobile device. Collaboration with the telecoms industry is key to increasing mobile banking activities, as banks cannot single-handedly reach everyone.
Having branches throughout the country is expensive, so we must use technology to increase our footprint. Mobile operators have a larger subscriber base and a more extensive reach. These industries all benefit from greater financial inclusion, so we must ensure that financial services penetrate all areas of the country.
Mobile banking has the potential to more than quadruple our customers and dramatically reduce the cost of banking. Instead of building additional branches, we can focus on innovative services. Moreover, as online and mobile transactions increase, banks will save money by not having to process cash and cheques.
ADEDUNTAN: It is important to recognise the progress Nigeria has made in this regard. I do not believe that Nigerian banks were offering credit or debit cards 12 years ago, whereas today banks are offering both, as well as boasting online and mobile-banking platforms. That said, there is room for improvement, particularly in terms of greater penetration of electronic financial services. There should be efforts to discourage cash-based transactions while encouraging electronic ones. Electronic transactions are preferred from a security perspective and also make monitoring liquidity easier. A robust awareness campaign is critical. Occasionally, when Nigerians attempt a transaction on an electronic platform – such as using a credit card, mobile banking or an ATM – there is a glitch. This often makes the customer reluctant to try an electronic transaction again, illustrating the importance of first impressions. In addition to the awareness campaign, standardisation and simplification of services are crucial for their success.
WIGWE: Larger banks are paying an increasing amount of attention to comprehensive digital banking strategies, particularly in retail. Mobile banking is central to increasing the customer base and boosting the rate of financial inclusion. More customers will boost the amount of capital in the banking system, while also increasing the flow of money into banks without necessarily raising the amount of lending. With roughly 60m unbanked Nigerians, there is still a large market to penetrate. To do this, it is vital to develop partnerships with telecoms operators. The use of the bank verification numbers (BVNs) as a veritable source of identification is important, as without a unique ID, individuals are more vulnerable to identity fraud and cybercrimes. The BVN system also benefits banks, which can make smarter decisions regarding potential clients. If there is a problem with a particular customer, a bank can blacklist the client across the entire industry. Accountability also makes the adoption of cards easier and quicker – if cardholders try to abuse or cheat the system, they will have a problem across the banking sector.
DOZIE: A major challenge that remains is the penetration of banking services, as the number of Nigerians who have utilised banks is far smaller than the country’s population. The banking industry is seeking ways to increase the pool of potential clients, and we believe that technology has a critical role to play. Through innovative measures that incorporate technology, the banking industry should target the bottom of the pyramid. E-banking services can increase transparency, since cashless transactions leave a digital trail of payments.
As government is the largest employer of labour, the minister of finance aims to make all government payments electronic. Although internet connectivity issues remain a challenge, I believe that Nigeria’s future is a cashless society and that technology is central to increasing the number of Nigerians that use financial services.
How effective have Nigeria’s credit bureaus been at closing information gaps and reducing lending risks in the retail and SME segments?
ADEDUNTAN: Credit bureaus exist to help eliminate information asymmetry. Previously, a problem for the banking sector was when an individual would visit a bank and receive a loan, which would then become bad debt. The individual would then proceed to another bank and obtain another loan as the bank would not be able to check the individual’s records. Credit bureaus and the Bank Verification Number system should work well to ensure people manage their credit in a more responsible manner. It is important to build a culture around credit and inform customers that once their credit history has been damaged, it will be more difficult to obtain a loan in the future.
WIGWE: The credit bureaus in Nigeria are still relatively new, so their impact thus far has not been fully felt. Banks have helped build their databases by publishing a list of defaulters on a quarterly basis. There are various sources of information, including the BVN system, national ID scheme and car registration programme. As each initiative gathers steam, the credit bureaus will populate their databases quickly.
DOZIE: Lending to many players in the private sector was difficult before the credit bureaus started, as banks did not know the creditworthiness of potential clients. It took a few years after the credit bureaus were established to see their impact, as building the necessary databases took time. It is now easier to gauge risk, which incentivises banks to offer more loans at rates that are more favourable to firms. If a company or individual enters a bank seeking a loan, we are obligated to submit their name to the credit bureaus. The Bank Verification System, which is part of the Central Bank of Nigeria’s cashless policy and captures customer data, has dramatically helped banks offer more efficient services to their clients.
AMANGBO: Given that credit bureaus in Nigeria are still young, they have done well. There is still a need for greater collaboration with banks, who give them the majority of their information. We must provide timely information and updates as often as possible. Credit bureaus must also partner with non-banking entities, as it is not only banks that are affected if a company defaults. It is encouraging to see courier services such as FedEx and DHL providing information to credit bureaus.
The more information credit bureaus have on potential borrowers, the more relevant and effective they will become. On the retail side of business, credit bureaus have not had too much of an impact because they do not have a critical mass of information just yet. So far, they have focused more on the corporate end, but as they concentrate more on individuals, retail operations will blossom.