INVESTMENT, FINANCE AND BANKING IN NIGERIA: EVOLUTION AND NEW OPPORTUNITIES

Tony O. Elumelu, MFR.GMD/CEO Designate

United Bank for Africa Plc[An amalgam of UBA & STB, Nigeria]

At the 2005 US – Africa Summit of the Corporate Council on Africa, Baltimore, USA

June, 2005

Nigeria• Large population – about 130m people• Fifteen years of military dictatorship ended in

May 1999• Military rule led to

Deplorable infrastructure Poor and declining capacity utilization Insecurity Inefficient legal system Rising inflation Severe unemployment Weak and fragile economic structure

A silent revolution• A quiet revolution has been taking root in Nigeria since

the return to democratic rule in 1999

• We cannot talk about investment opportunities in Nigeria without commenting on this revolution that is taking root as the basic infrastructure and platform that creates a conducive investment climate are being permanently reshaped

• Quiet, but well coordinated, sure-footed and steady• It appears irreversible. For instance al key drivers of reform

agenda have tenures that extend beyond that of current administration

A silent revolution• Anti corruption and crime

crusade• ICPC• EFCC – a number of high profile

arrests and prosecutions• Strengthening of the judiciary and

legal system• Nigerian Drug Law Enforcement

Agency

A silent revolution• IT & Telecomms

• Laudable achievements in provision of telecommunications services

• Increased awareness and use of IT and technology tools in business and everyday life of Nigerians

• Communication infrastructural backbone rolled out across the country

• More funds from the informal sector is being attracted to the formal sector of the economy

A silent revolution• Economic Reforms

• National Economic Empowerment and Development Strategy [NEEDS]

• Privatization of public enterprises• Deregulation & Liberalization• Free market principles and Economic

reforms • Port sector reforms• Power sector reforms• Financial sector reforms• Tax Administration

Financial Sector Reforms• Major structural reforms are

taking place in the following sub-sectors

• Banking• Pension funds• Capital markets

Banking IndustryPre-Soludo Reform Era• 70’s and 80’s dominated by the ‘big three’ banks –

Union Bank, First Bank and United Bank for Africa and a few other local banks

• Industry was deregulated in 1986• The number of banks increased to over 100• Many of the new entrants were characterized by

weak capitalization and poor management quality• There was also weak regulatory supervision • All of these led to the collapse of some of the new

banks in an industry shake-out

Banking IndustryPre-Soludo Reform Era• By 2003, there were about 89 banks left• 7 were appointed as settlement banks for the

whole industry• The ‘big three’ plus four of the

stronger new generation entrants, including Standard Trust Bank Plc

• Banks were comparatively small in size – the total capitalization of all the banks in the country was less than the capitalization of ABSA ($46bn)

Banking IndustrySoludo Reform Era• New team appointed to lead the Central Bank of

Nigeria [CBN] in May 2004• Prof Charles Soludo appointed CBN Governor

• Professor of Economics• Rhodes Scholar• Author of the federal government’s NEEDS

program• Professor Soludo announced a consolidation plan

designed to reform and grow capacity in the Nigerian banking industry in July 2004

Banking IndustrySoludo Reform Era - The consolidation plan

• raised minimum Shareholders’ Fund for banks in the country to N25bn [about US$200MN] from the former level of N2bn [US$15MN]

• provided incentives for banks in the country to consolidate through mergers and acquisitions

• sought to encourage banks to play active development roles in the Nigerian economy, while being competent and competitive players in African regional and global financial systems

Banking IndustrySoludo Reform Era - The consolidation plan• Many banks have recapitalized to meet the new

minimum shareholders’ fund requirement through private placements, right issues and public offers

• So far, about 60 banks have announced plans to merge into 20 bigger and stronger banks

• STB and UBA are merging to create one of the biggest banks in the sub-region with assets in excess of N400bn [approximately $4bn]

Banking IndustryOpportunities

1. The opportunity to create mortgage loans and a market for mortgage backed securities. Estimated market potential is in excess of N18trillion [US$136BN]

2. Creating a market for consumer finance and micro credit. The huge population of the country and the growing new middle class present a very viable opportunity to develop this market

3. Developing the concept of Bancassurance in the country

Banking IndustryOpportunities

4. Creating and developing a market in long term debt instruments. This includes government bonds, corporate bonds, and Asset-backed securities

5. Syndication of large ticket deals in the oil & gas, telecoms, infrastructure and energy sectors

6. Corporate and Project finance opportunities7. Venture capital business

Pension Industry• Prior to the new Pension Reform Act

2004, pensions were• Mandatory in the public sector but optional in

the private sector• Government used taxes derived from active

workers to fund the pension of retired workers. • Most private companies did not have any

pension scheme for their employees • This system proved to be unsustainable leading

to a public sector pension funding deficit estimated at about N2trillion [US$15BN][1]

[1] Asset and Resource Management Company, “Pension reforms in Nigeria – A solution in sight?” – May 2004

Pension Industry• The 2004 Pensions Reform Act

established a • Uniform• Contributory• private sector managed and • fully funded pension system for both

the public and the private sectors of the country

Pension Industry• Employee would contribute 7.5% of their total

emoluments to a Retirement Savings Account [RSA]

• Employers would also contribute a minimum of 7.5%. This is applicable to all companies with 5 or more employees

• Management of the RSA is vested in Pension Fund Administrator [PFA] companies

Pension Industry• PFAs are firms of professional fund managers,

the PFC must have a net worth of at least N5bn and have a balance sheet size of at least N125bn

• Pension Funds Custodian [PFC] companies would hold the funds in trust for the contributors. STB/UBA is sponsoring the establishment of a Pension Fund Custodian company

• The Act vests the regulation and supervision of the country’s pension system in the Nigerian Pension Commission

Pension IndustryOpportunities1. Pension Fund Administration - compulsory savings

would mobilize long term funds in the country. The size of the pension funds market is estimated at N300bn [$25bn] with a projected growth rate of about 15% p.a.

2. Corporate Finance and Financial Advisory - creation and development of market for long-term securities such as bonds, mortgages and other asset backed securities

3. Asset Management - development of expertise in Asset management and Custodianship

Pension IndustryOpportunities4. Opportunity also exists for alliances

with global custody companies in areas such as

• Data management• Technology and • Technical expertise.

Capital Market• This sector has seen steady improvement

over the past decade• It started depository services in 1997 when

its subsidiary the Central Securities Clearing System commenced operations

• In 1999, it introduced the Automatic Trading System to replace the former call-over trading system

• In 2000, the settlement and clearing cycle was reduced from 5days to 3days

Capital Markets• The reforms taking place in the banking

and pensions sectors are affecting this sector and portend new opportunities here

• Over $1bn has been raised in the market by banks who are seeking to recapitalize, leading to a deepening of the market

• The pension reforms would create a pool of long-term funds which would be channeled into the market to further deepen it

Capital Market

• More companies are beginning to see the benefits and are going to this market to raise funds

• Increasing activities in primary market with huge potential for increased activities in the secondary market

Capital MarketOpportunities1. Creation of new types of financial

instruments 2. Trading in options and futures3. Creation of a market for long term

government and corporate bonds4. Efficient Registrar services5. Payment and settlement services

driven by technology

The Future

• The Nigerian economy is undergoing major structural changes and this is probably an ideal time to engage

• The fear of policy sustainability does not arise as key drivers of process have terms that stretch beyond that of the present administration

• The reforms have assumed a life of their own which makes it difficult for a single individual to alter these winds of change

• Entry now may well be ideal

Thank you