Making Nigeria Africa’s Financial Service Hub

Currently most Nigerian Banks are struggling with the fiscal crisis in Nigeria caused by crashing global oil prices over the last several months. Major Nigerian banks are among the most exposed banks in the developing world to the oil industry. Only Russian banks are having close to as much issue as major banks in Nigeria. Coupled with this, declining government revenue, which is 90% derived from oil, has cut into limited government reserves leaving the Nigerian Central Bank unable to inflate the value of the naira by injecting foreign capital. Over the last several months the Naira has collapsed to all-time lows falling below 200 to 1 dollar for the first time in history. It is fully expected that once the election is held, the central bank will allow the naira to decline further even below its low of 213 to 1 dollar. All of this has left policy-makers scrabbling to diversify Nigerian exports outside of the oil industry to reduce the nations reliance on the commodity. Similarly, the largest banks in Nigeria are adopting a conservative stance towards expansion and are scrambling to reduce their exposure to the oil sector.

The core of the solution to diversify Nigeria's exports as well as reduce the exposure the nation's largest banks to the oil industry are one in the same. Financial services are the primary export product that Nigerian policy-makers and decision-makers within banks, and residual financial institutions in the country should be focused on building. Nigerian banks have done a very poor job of building their services, including investment banking and asset management. In the consolidation of Nigerian banks spearheaded by the Nigerian Central Bank about a decade ago, little was done to encourage banks to diversify and build their services beyond retail banking and basic corporate banking. Today, the top banks in Nigeria are not among the major banks providing large Nigerian firms investment banking services. In fact their presence in investment banking in Nigeria is paltry compared to foreign investment banks that have come into Lagos, set up shop, and raked in huge profits under the noses of major Nigerian Banks. For example, when Seplat, a major Nigerian oil firm, conducted their $500 million USD IPO in April 2014, completing a dual listing on the Nigerian Stock Exchange and the London Stock Exchange, the only “Nigerian” participants were Standard Bank & Renaissance Capital, a South African Bank and a Russian Bank with major investment banking divisions operating in Nigeria. FBN Capital of First Bank of Nigeria, perhaps the most significant indigenous investment banking house among the major banks in Nigeria has not been involved in the overwhelming majority of major investment banking deals involving Nigerian firms. Even the Asset Management Corporation of Nigeria (AMCON), when soliciting advice in auditing and valuating Mainstreet and Keystone bank for sale, selected Citibank and Renaissance Capital as advisors, completely ignoring the possibility of utilizing a Nigerian firm. Since AMCON is owned by the government of Nigeria, the fact that even they bypassed Nigerian financial service providers says a lot about the state of the industry in the country.

Even worse, many of the largest banks in the country that are currently reeling in the wake of the oil crisis, either do not have investment banking divisions at all (which is ridiculous), or have divisions that are not in any way significant in the industry in Nigeria. In fact boutique investment banks in Nigeria have done better in the industry than many of the major banks in the country, including Greenwich Trust, BGL Securities, Chapel Hill Denham, and Vetiva Capital. As Nigerian banks seek to diversify away from oil, they are going to have to adopt a stance that if they want to lead in Nigeria and in Africa, they are going to need to corner not just the basic retail banking industry in Nigeria but also the investment banking and financial service industry including asset management. The Central Bank of Nigeria should have a major role in encouraging this development. Increasingly Nigerian firms are going to be listed on exchanges outside of Nigeria and are going to raise capital from international investors. When they do, major Nigerian banks should be involved. Foreign banks that have set up subsidiaries in Nigeria should not be completely having their way in exporting these financial services outside of the country for the few large firms that they choose to work with.

In addition to investment banking services, asset management services is not a major element in the overall business structure of major Nigerian banks. Some of the top banks have no asset management division or instruments for investors at all (which is ridiculous). Asset management, or the service of sourcing investment capital on behalf of institutional and individual investors is one of the single most important financial services in most modern and rapidly developing economies. Yet in Nigeria the industry lags far behind the top performers in Africa, yet alone the rest of the world. South Africa and Mauritius are by far the undisputed African leaders in the asset management industry, despite Nigeria being the largest economy on the continent. Major Nigerian banks are in-part to blame for this dynamic. They have not developed enough high-performing funds to market to global investors and have spent very little time and resources in positioning themselves as leaders in this area. Aside from this a number of smaller investment holding companies throughout Nigeria, that have proven very effective at investing with their own resources, have not set up funds and do not export their services to international investors that have been clamouring for their services and expertise in Nigeria and West Africa. Companies like the Honeywell Group, which has 10 divisions, but no asset management fund, would be able to launch several funds overnight in Nigeria on the basis of their investment record alone. Why do companies like this in Nigeria not have asset management divisions despite the massive demand for their services globally? Further why are there so few asset managers in Nigeria compared to South Africa and Mauritius. There are three key obstacles: 1) the SEC of Nigeria, 2) Over-regulation of Nigerian Pension Funds, 3) Lack of Support from Nigerian DFIs.

1. SEC of Nigeria
The SEC of Nigeria is among the most unprofessional and unproductive regulatory agencies in Nigeria as compared with their counterparts in other rapidly developing nations. Their standard of operation is reprehensible at best, and would never be tolerated in many developing nations that are seeking to become global leaders including the (BRICS), Brazil, Russia, India, China, and South Africa. It would take exponentially more time and resources for a well established firm like the Honywell Group to register an asset management fund with the SEC of Nigeria than it would take that same firm to register their fund in Mauritius and then turn around and do business in Nigeria. In fact many of the asset managers with offices in Nigeria are actually Mauritius registered companies, even those owned and founded by Nigerian nationals! This embarrassing dynamic is directly linked to the unprofessional nature of the Nigerian SEC that has created a major stumbling block to Nigeria's most promising emerging export product. In order for Nigeria to meet its capital needs for development and growth the country requires several hundred new asset management funds to be established in Nigeria over the next 12-18 months. The existing banks in Nigeria that do not have asset management funds as of yet or only have a few, the diversified investment groups like Honeywell, high-performance microfinance banks, and boutique investment companies and investment banks that are already operating in Nigeria today are fully capable of bringing this many fund companies on-line in Nigeria during this time and begin exporting their financial services to individual and institutional international capital investors. This is by far the most promising export product Nigeria has today and it would take absolutely no time for these firms to convert Nigeria from being primarily an oil exporter to a financial service exporter. However, the SEC of Nigeria as-is, cannot facilitate this. It would be a miracle if they were able to get a handful of over-qualified applicants processed and registered in two years yet alone match the two month time-line achieved in most of the countries that are leaders in financial service exports. The Ministry of Finance and Ministry of Trade should be leading the drive to force the SEC to reform itself from the top–down in-line with this global standard. Asset management financial services have more promise and a quicker implementation time than any of the 13 products that the Nigerian Export Promotion Council and Ministry of Trade identified. Further there will not be enough capital to develop any of the other 13 export-oriented industries without first having a massive increase in financial service exports. So the fact that the Ministry of Trade continues to do very little to enhance this area given the reality on the ground is unbelievable. Moving forward, the number one agenda of the Ministry of Trade over the next 12-18 months should be to get all potential financial service exporters registered as Nigerian funds and do a road show along with the Ministry of Finance throughout all global financial centers to solicit international clients on their behalf.

2. PenCom & Nigerian Pensions Regulation
Nigerian Pensions are among the most over-regulated sectors in the country and in the world. Much of the over 20 billion dollars held in Nigerian pension funds remains idle despite the dire need for investment capital in infrastructure and high-growth profitable industry in Nigeria. The fact that Nigerian firms are conducting IPOs that foreign pensions are investing in and making substantial returns while Nigerian pensions are prevented by regulation from participating is nonsensical. It is a known fact that the industry in Nigeria is highly-overregulated yet deregulation has moved at a snails pace. The reforms of the Nigerian Pension Commission in 2014 is suppose to address some of these issues. With the country starved for investment capital and the dire need for infrastructure and development project funds, the pace of deregulation should pick up. The Nigerian public needs to understand that as they have no jobs, inflation is increasing, and austerity measures are kicking-in because there is no money, the pensions funds have over 20 billion dollars that is sitting there in naira, losing value as the currency devalues, and collecting dust. Needless to say, the financial service and asset management industry in Nigeria is hindered because the overregulation of PenCom has left that capital inaccessible. It is very problematic when a prospective Nigerian asset manager is trying to pitch their asset management services to a foreign pension fund while the equivalent pension fund in Nigeria is prevented by regulation from investing capital with them. The foreign pensions will understandably wonder why are Nigerian pensions staying away if this is a good investment opportunity? Accordingly in order for the industry to be marketable internationally, Nigeria must get its own house together to help its asset managers have greater success as they venture out for global capital. Moving forward the long over-due deregulation of Nigerian Pensions that passed into law in 2014 needs to support Nigerian asset management and financial services. Just as with the SEC, both Ministry of Finance and Ministry of Trade should push harder with PenCom.

3. Nigerian DFI's
Despite the fact that financial services is among the largest industry in developed nations, and is one of the key sectors that pushes a developed nation into developed status, Nigerian DFI's by strictly interpreting their mandates do absolutely nothing to support development of the financial services industry in Nigeria. The Nigerian Export-Import Bank (Nexim), who's core mandate it is to support non-oil exports cannot accord a single measure it has to support an indigenous Nigerian asset managers, despite this being the most promising non-oil export product that the country has. Bank of Industry of Nigeria (BOI) does not even consider financial services as an industry. According the them and their narrow interpretation of their mandate, only manufacturing is worthy of their consideration, despite the fact that the financial service industry by far eclipses manufacturing in total economic output in every modern and developed economic power in the world. They fail to realize that it is a vibrant financial service industry that inherently supports and finances manufacturing and export-oriented industry. If they had the foresight to leverage their limited resources with asset managers that focused on manufacturing and/or export-oriented industries, they would achieve far more in 1 year than what they have done over the last 5 years. Moving forward Nigerian DFIs and the policy-makers that oversee them can no longer afford to ignore the symbiotic partnership that these intuitions need to develop with the financial service and asset management industry.

Moving forward policy-makers in Nigeria today need to realize that it is not enough for Nigeria to declare itself as the largest economy in Africa, it needs to be Africa's leader in all relevant industries, especially financial services. Nigeria should not only host the continents largest banks, it should also have most effective and the largest number of investment banks and asset management funds. The firms that are able to do this are in Nigeria today and they are the most promising exporters for Nigeria. Thus by pushing them to the fringes instead of making them the primary focus the Ministry of Trade and Finance along with the Central Bank of Nigeria have handicapped the Nigerian economy from expanding at the pace it could have over the last 5 years. They are responsible for the narrow mandates of the DFIs, the incompetence of the SEC, the slow pace of deregulation of PenCom, and in part the lack of diversification within Nigeria's major banks. If you start to compare these officials and their performance by placing them alongside their counterparts in other major emerging economies in the world, you will begin to see clearly that they are failing Nigeria miserably. Unfortunately for Nigeria, the technocratic policy-makers in the country are held to an internal standard, one that compares them to the past officials that held their post. As long as they perform slightly better on the job than their highly corrupt and often unqualified predecessor they are heaped with praises and accolades. They sit in ivory towers surrounded by bubbles of “Yes Sa! Yes Ma!.. aides and associates” who shield them from having any substantive interaction with the disillusioned public. This culture of baseless praise of a persons position rather than their performance in that position, only serves to propagate the cancer of incompetence pervading throughout the nations economic decision-makers at all levels in both the private and public sector. While the private sector pays the price for their failures because bank stock prices have plummeted and some banks like Diamond Bank may not even survive. Further they (Nigerian banks) are being beaten badly by foreign investment banks and asset managers that have come in after them and set up shop in the country. On the other side, the public sector continues to rot internally as they are being surpassed by their international counterparts abroad as a result of their failure and incompetence, yet its the Nigerian public that pays the price, while the officials that are responsible make off handsomely. Its this same cancer of incompetence that affects our armed services and greatly impacts the ability of mainstream Nigerian media to question and expose gross incompetence among economic and political decision-makers. More than ever the Nigerian public needs to reject the baseless praise that mainstream Nigerian media heap on certain public officials and reject the overemphasis of corruption in public discourse because now its only a distraction that helps to shield incompetent public officials from the scrutiny of far worse and far more costly decisions that they have made. It is Nigeria's destiny to become Africa's financial service hub, but the Nigerian people have to put this disease, this cancer of incompetence that is weakening the nation, in remission.

Kuranga and Associates Limited is an investment management advisory firm and an asset manager with a principle practice area of Africa. To learn more about Kuranga and Associates go to www.kaglobal.net. © Copyright 2014 David Kuranga. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

David O. Kuranga; Ph.D.
Managing Director
Kuranga & Associates Limited
Phone: 212.363.0936
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