Tony Elumelu

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Tony Elumelu

  1. 1. 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
  2. 2. Nigeria <ul><li>Large population – about 130m people </li></ul><ul><li>Fifteen years of military dictatorship ended in May 1999 </li></ul><ul><li>Military rule led to </li></ul><ul><ul><ul><ul><li>Deplorable infrastructure </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Poor and declining capacity utilization </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Insecurity </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Inefficient legal system </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Rising inflation </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Severe unemployment </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Weak and fragile economic structure </li></ul></ul></ul></ul>
  3. 3. A silent revolution <ul><li>A quiet revolution has been taking root in Nigeria since the return to democratic rule in 1999 </li></ul><ul><li>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 </li></ul><ul><li>Quiet, but well coordinated, sure-footed and steady </li></ul><ul><ul><li>It appears irreversible. For instance al key drivers of reform agenda have tenures that extend beyond that of current administration </li></ul></ul>
  4. 4. A silent revolution <ul><li>Anti corruption and crime crusade </li></ul><ul><ul><ul><ul><li>ICPC </li></ul></ul></ul></ul><ul><ul><ul><ul><li>EFCC – a number of high profile arrests and prosecutions </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Strengthening of the judiciary and legal system </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Nigerian Drug Law Enforcement Agency </li></ul></ul></ul></ul>
  5. 5. A silent revolution <ul><li>IT & Telecomms </li></ul><ul><ul><li>Laudable achievements in provision of telecommunications services </li></ul></ul><ul><ul><li>Increased awareness and use of IT and technology tools in business and everyday life of Nigerians </li></ul></ul><ul><ul><li>Communication infrastructural backbone rolled out across the country </li></ul></ul><ul><ul><li>More funds from the informal sector is being attracted to the formal sector of the economy </li></ul></ul>
  6. 6. A silent revolution <ul><li>Economic Reforms </li></ul><ul><ul><li>National Economic Empowerment and Development Strategy [NEEDS] </li></ul></ul><ul><ul><li>Privatization of public enterprises </li></ul></ul><ul><ul><li>Deregulation & Liberalization </li></ul></ul><ul><ul><li>Free market principles and Economic reforms </li></ul></ul><ul><ul><ul><ul><ul><li>Port sector reforms </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Power sector reforms </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Financial sector reforms </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Tax Administration </li></ul></ul></ul></ul></ul>
  7. 7. Financial Sector Reforms <ul><li>Major structural reforms are taking place in the following sub-sectors </li></ul><ul><ul><ul><ul><li>Banking </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Pension funds </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Capital markets </li></ul></ul></ul></ul>
  8. 8. Banking Industry <ul><li>Pre-Soludo Reform Era </li></ul><ul><li>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 </li></ul><ul><li>Industry was deregulated in 1986 </li></ul><ul><li>The number of banks increased to over 100 </li></ul><ul><li>Many of the new entrants were characterized by weak capitalization and poor management quality </li></ul><ul><li>There was also weak regulatory supervision </li></ul><ul><li>All of these led to the collapse of some of the new banks in an industry shake-out </li></ul>
  9. 9. Banking Industry <ul><li>Pre-Soludo Reform Era </li></ul><ul><li>By 2003, there were about 89 banks left </li></ul><ul><li>7 were appointed as settlement banks for the whole industry </li></ul><ul><ul><ul><ul><li>The ‘big three’ plus four of the stronger new generation entrants, including Standard Trust Bank Plc </li></ul></ul></ul></ul><ul><li>Banks were comparatively small in size – the total capitalization of all the banks in the country was less than the capitalization of ABSA ($46bn) </li></ul>
  10. 10. Banking Industry <ul><li>Soludo Reform Era </li></ul><ul><li>New team appointed to lead the Central Bank of Nigeria [CBN] in May 2004 </li></ul><ul><li>Prof Charles Soludo appointed CBN Governor </li></ul><ul><ul><ul><ul><li>Professor of Economics </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Rhodes Scholar </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Author of the federal government’s NEEDS program </li></ul></ul></ul></ul><ul><li>Professor Soludo announced a consolidation plan designed to reform and grow capacity in the Nigerian banking industry in July 2004 </li></ul>
  11. 11. Banking Industry <ul><li>Soludo Reform Era - The consolidation plan </li></ul><ul><ul><ul><li>raised minimum Shareholders’ Fund for banks in the country to N25bn [about US$200MN] from the former level of N2bn [US$15MN] </li></ul></ul></ul><ul><ul><ul><li>provided incentives for banks in the country to consolidate through mergers and acquisitions </li></ul></ul></ul><ul><ul><ul><li>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 </li></ul></ul></ul>
  12. 12. Banking Industry <ul><li>Soludo Reform Era - The consolidation plan </li></ul><ul><li>Many banks have recapitalized to meet the new minimum shareholders’ fund requirement through private placements, right issues and public offers </li></ul><ul><li>So far, about 60 banks have announced plans to merge into 20 bigger and stronger banks </li></ul><ul><li>STB and UBA are merging to create one of the biggest banks in the sub-region with assets in excess of N400bn [approximately $4bn] </li></ul>
  13. 13. Banking Industry <ul><li>Opportunities </li></ul><ul><ul><ul><li>The opportunity to create mortgage loans and a market for mortgage backed securities. Estimated market potential is in excess of N18trillion [US$136BN] </li></ul></ul></ul><ul><ul><ul><li>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 </li></ul></ul></ul><ul><ul><ul><li>Developing the concept of Bancassurance in the country </li></ul></ul></ul>
  14. 14. Banking Industry <ul><li>Opportunities </li></ul><ul><ul><ul><li>Creating and developing a market in long term debt instruments. This includes government bonds, corporate bonds, and Asset-backed securities </li></ul></ul></ul><ul><ul><ul><li>Syndication of large ticket deals in the oil & gas, telecoms, infrastructure and energy sectors </li></ul></ul></ul><ul><ul><ul><li>Corporate and Project finance opportunities </li></ul></ul></ul><ul><ul><ul><li>Venture capital business </li></ul></ul></ul>
  15. 15. Pension Industry <ul><li>Prior to the new Pension Reform Act 2004, pensions were </li></ul><ul><ul><ul><ul><li>Mandatory in the public sector but optional in the private sector </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Government used taxes derived from active workers to fund the pension of retired workers. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Most private companies did not have any pension scheme for their employees </li></ul></ul></ul></ul><ul><ul><ul><ul><li>This system proved to be unsustainable leading to a public sector pension funding deficit estimated at about N2trillion [US$15BN] [1] </li></ul></ul></ul></ul><ul><li>[1] Asset and Resource Management Company, “Pension reforms in Nigeria – A solution in sight?” – May 2004 </li></ul>
  16. 16. Pension Industry <ul><li>The 2004 Pensions Reform Act established a </li></ul><ul><ul><li>Uniform </li></ul></ul><ul><ul><li>Contributory </li></ul></ul><ul><ul><li>private sector managed and </li></ul></ul><ul><ul><li>fully funded pension system for both the public and the private sectors of the country </li></ul></ul>
  17. 17. Pension Industry <ul><li>Employee would contribute 7.5% of their total emoluments to a Retirement Savings Account [RSA] </li></ul><ul><li>Employers would also contribute a minimum of 7.5%. This is applicable to all companies with 5 or more employees </li></ul><ul><li>Management of the RSA is vested in Pension Fund Administrator [PFA] companies </li></ul>
  18. 18. Pension Industry <ul><li>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 </li></ul><ul><li>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 </li></ul><ul><li>The Act vests the regulation and supervision of the country’s pension system in the Nigerian Pension Commission </li></ul>
  19. 19. Pension Industry <ul><li>Opportunities </li></ul><ul><li>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. </li></ul><ul><li>Corporate Finance and Financial Advisory - creation and development of market for long-term securities such as bonds, mortgages and other asset backed securities </li></ul><ul><li>Asset Management - development of expertise in Asset management and Custodianship </li></ul>
  20. 20. Pension Industry <ul><li>Opportunities </li></ul><ul><li>Opportunity also exists for alliances with global custody companies in areas such as </li></ul><ul><ul><ul><ul><li>Data management </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Technology and </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Technical expertise. </li></ul></ul></ul></ul>
  21. 21. Capital Market <ul><li>This sector has seen steady improvement over the past decade </li></ul><ul><li>It started depository services in 1997 when its subsidiary the Central Securities Clearing System commenced operations </li></ul><ul><li>In 1999, it introduced the Automatic Trading System to replace the former call-over trading system </li></ul><ul><li>In 2000, the settlement and clearing cycle was reduced from 5days to 3days </li></ul>
  22. 22. Capital Markets <ul><li>The reforms taking place in the banking and pensions sectors are affecting this sector and portend new opportunities here </li></ul><ul><ul><ul><ul><li>Over $1bn has been raised in the market by banks who are seeking to recapitalize, leading to a deepening of the market </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The pension reforms would create a pool of long-term funds which would be channeled into the market to further deepen it </li></ul></ul></ul></ul>
  23. 23. Capital Market <ul><li>More companies are beginning to see the benefits and are going to this market to raise funds </li></ul><ul><li>Increasing activities in primary market with huge potential for increased activities in the secondary market </li></ul>
  24. 24. Capital Market <ul><li>Opportunities </li></ul><ul><li>Creation of new types of financial instruments </li></ul><ul><li>Trading in options and futures </li></ul><ul><li>Creation of a market for long term government and corporate bonds </li></ul><ul><li>Efficient Registrar services </li></ul><ul><li>Payment and settlement services driven by technology </li></ul>
  25. 25. The Future <ul><li>The Nigerian economy is undergoing major structural changes and this is probably an ideal time to engage </li></ul><ul><li>The fear of policy sustainability does not arise as key drivers of process have terms that stretch beyond that of the present administration </li></ul><ul><li>The reforms have assumed a life of their own which makes it difficult for a single individual to alter these winds of change </li></ul><ul><li>Entry now may well be ideal </li></ul>
  26. 26. <ul><li>Thank you </li></ul>

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