Late last year, the Central Bank of Nigeria (CBN) Governor, Olayemi Cardoso, harped on the need for recapitalized banks when he hinted that the apex bank would direct deposit money banks in the country to increase their capital base in order to make President Bola Tinubu’s $1 trillion economy plan a reality. Tinubu said in October 2023 that a $1 trillion Nigerian economy was possible by 2026, and a $3 trillion economy within the decade.
Cardoso, who made government’s intention known while delivering his keynote address at the 58th annual dinner of the Chartered Institute of Bankers of Nigeria (CIBN) in Lagos explained that Nigerian banks do not have sufficient capital relative to the financial system’s needs in servicing a $1 trillion economy unless action was taken.
Though no specific timeframe was given when the recapitalisation exercise would commence, Jeff & O’Brien UK, an international professional knowledge development firm that has pioneered financial, corporate and deep content knowledge development in Africa, is organising a one-day colloquium and workshop on “Bank recapitalisation and value creation strategies” in Lagos on February 6, 2024 with Prof Kingsley Moghalu, former Deputy Governor of the CBN, as the Keynote Speaker.
In this interview with IKECHUKWU AMAECHI, Mr. Pascal Odibo, Group Country Director at Jeff & O’Brien knowledge, and host of the colloquium, elucidates on the twin issues of consolidation and recapitalisation and prospects for the Nigerian economy.
The Central Bank of Nigeria (CBN) late last year indicated that it would direct deposit money banks in the country to recapitalise in order to increase their capital base. What does that mean to you? Did it come as a surprise?
What comes to mind is déjà vu. We have been here before and if you cast your mind back, you may begin to guess why the witch is crying again. The last time this was done was 2004 when Prof Chukwuma Soludo was CBN Governor and his argument then was that the financial system could not carry the whole initiatives and vision of the Obasanjo government in terms of infrastructure development, public private partnership funding, access to capital, funding agriculture, etc. He said that all the banks in Nigeria then, if my memory serves me right, over 100 banks, put together didn’t have up to the capital base of one bank in South Africa.
Also, at that time too, the government wanted to set up what it called the financial centre and they said, before embarking on that journey, it would be good to have very strong and well-funded banks that can serve as critical pillars for such noble financial projects.
So, this is 20 years down the line and it is clear to everybody that inflation and the high exchange rate have eaten deep into such calculations in the past and, therefore, there is a need to look at the policy again.
But most importantly, having listened to the government of the day with its bold fiscal policies and initiatives to revitalise the economy, and Nigeria having gone through what I will describe as one of the worst locust years in its annals, which is the Buhari regime, the government needed critical pillars to reflate the economy. And so, when the government said it wanted to run a $1 trillion economy, and listed an eight-point agenda, inclusive of access to capital and student loan scheme, I immediately knew that banks as presently structured needed to be recalibrated and recapitalised.
So, if this is done, it will go a long way to signal the resurgence of Nigeria’s financial system to be able to take on big and bold projects which is what will reflate the economy and give the country some leverage.
Twenty years ago, we were talking about consolidation. Today, it is recapitalisation. What is the difference between what was done in 2014 and what is being proposed now?
They are almost the same, yet different. Consolidation talks about coming together and it entails mergers and acquisition (M&A), pulling of resources together, you will see what they call less for more. In consolidation, two, three or more businesses can come together and say let us consolidate and take up the bigger businesses out there. Of course, you remember that about a week ago, Global Infrastructure Partners (GIP) owned by Bayo Ogunlesi, allowed itself to be bought over by BlackRock, the world’s largest asset manager for about $12.5 billion in cash and stock. Now that is a consolidation. Both of them had something to bring to the table and they are able to build a stronger business in order to take up bigger business opportunities.
But recapitalisation speaks about, can you up your game? Can you increase the capital that you have? Now, while I said they look and sound alike is that if in the bid to recapitalise, you are not able to pull your resources together, the next port of call is consolidation. You will now begin to seek for strategic partners, you now position yourself as the beautiful bride or become a roaring hostile agent. And that is why the colloquium we are running on February 6, 2024 comes into play because there is always a method to every madness.
Because we had done this in the past, we were part of those that assisted the banking community to build the kind of capacity and competences that were required to power financial system at that time, we felt that we should also lead the charge this time around by getting the stakeholders together to show them the dimensions and possibilities that the process offers. Whether it is consolidation or recapitalisation, like I said earlier, there is always a method to every madness. We need to engage them in ways to recapitalise the balance sheet such that it becomes profitable and legally acceptable. You are able to manage it in such a way as to attract not only local but international partners enabling you to be able to take a strong position in the recapitalisation process.
So, whether it is recapitalisation or consolidation, the idea is to make businesses bigger and stronger. However, the challenge in consolidation is that it has some downsides. If the banks are able to pull through recapitalisation without a consolidation, then those downsides could be managed. There is also a downside to recapitalisation. That is why this workshop is important. Don’t forget that many of the people there in 2004 are no longer on the saddle now. So, the new people need to understand what is going on and hopefully, we will be able to accomplish that goal.
Looking back, would you say that the consolidation of 2004 achieved its goals?
Yes and no! Let me start with the No. The consolidation put a lot of resources in the hands of the banks and many of them that didn’t have the kind of corporate structure that would enhance corporate governance and managers with strategic vision frittered away those resources. There was so much misappropriation of funds.
But the plus side is that if you are like me that travels around Africa often, and you go to Kenya, Uganda, Tanzania, Gambia, name them, you will see the footprint of Nigerian banks and you will be proud to be a Nigerian. The moment that the consolidation took place, the visionary leadership in some of the banks became very bullish. They understood that money is a tool and they began to invest, lend, expand and increase their loan book. That is how banks grow. You have to invest, and give loans because banks make money by lending, primarily. Any bank that is not lending dies with time. However, there are rules that guide and enable visionary leadership or strategic corporate governance to ensure that you play by the rules so that you don’t overreach yourself.
The consolidation gave the enterprising banks with visionary leadership an opportunity to explore beyond the shores of Nigeria.
Considering the state of the Nigerian economy right now, how will bank recapitalisation help?
This question is very important because it goes to the core of the link between politics and economy. If you don’t have a bullish politics, if you don’t have a bullish leadership, they will play safe and say don’t rock the boat. However, if you have a bullish political leadership that can see possibilities, that appreciates that Nigeria is not playing at her weight – you know Nigeria is a heavy weight that is playing at the feather category – and what it takes to reengage is the financial system. Recapitalisation throws up resources, loanable funds and that is what is now used to begin to implement some of the political agenda especially if the political class is serious.
For instance, included in President Tinubu’s eight point agenda is access to capital and the students’ loan scheme. These two things will suck money. Access to capital is it. If you want to reflate any economy, you have to encourage lending for productivity and also encourage lending for consumption. Now, most people don’t want to hear about lending for consumption. But whether you are buying cars or whatever, what needs to be done is that banks should be able to fund large ticket infrastructure. A consortium of banks can come together and fund public-private partnership projects. For instance, we need a consortium that will be able to fund fourth or fifth Mainland Bridge in Lagos or another railway line from Lagos to Calabar. These are some of the things that if the banks are properly funded, they can trigger the public-private partnerships and attract the funding that is required. Weak financial systems will not be able to do that. So, recapitalised banks are what we call critical material necessary for infrastructure or for national development. There must be understanding in this regard.
Secondly, if someone gets gainfully employed and knows that he has access to any kind of loan, it helps. Let me take car loan for instance. If there are about one million people employed in a year that have reason to access N10 million loan for a vehicle, that can trigger an interest for Innoson Motors to set up a Sedan automobile factory line knowing that there are off takers. That means that Innoson Motors will have to go to the banks that are now properly funded to finance such a project. Now, you see the correlation? It means that real estate people will be able to invest and build flats – two-bedroom, three bedroom, four bedroom flats – funded by banks, knowing that there will be off takers – the young ones who have been hired by some companies. So, the whole thing works together. A recapitalised banking system is a sine-qua-non if Nigeria is to be reinvigorated.
But isn’t there a contradiction here? Right now, we have an economy that is on its knees, banks are not lending to businesses, over 130 million Nigerians are multi-dimensionally poor, yet they are declaring multi-billion profits every year. If banks earn their pay by lending and in Nigeria they are not, where is their profit coming from?
That question is very germane. When people are multi-dimensionally poor, the temptation is to throw money at them, to give them hand-outs. I hate hand-outs. It not only impoverishes the person, it challenges their psyche and it becomes an entitlement problem. No society grows with that. However, it can help as a stop gap measure, in other words, if someone is out of job, for instance, there is that support as a temporary succour.
Now, what is going on in the Humanitarian Ministry is that the moment you throw money at people who are multi-dimensionally poor, they keep coming back. It becomes like an opium. It may sound and look good in the beginning but it will definitely degenerate into what we are seeing now. So, the point I am making here is that the solution to the challenge of poverty is to get the people productive. This almajiri kind of governance is strange to Nigeria. That is not how we were trained. That was not how the economy we had before Buhari became president functioned.
While there should be an apportioning for the less privileged, it cannot become the main thing. So, my take is this: the poverty in the land should be addressed by encouraging the banks to lend to SMEs. The people must be busy producing. Even if it is little, you keep them busy and they can fend for themselves and it adds to the gross national product. But when you are throwing money at problems, you can never solve the problem. Never! You just create a generation of people that are entitled.
So, my suggestion is that the banks should be empowered to be able to fund projects, ideas, creativity. Nigerians are some of the most creative people in the world. I have travelled extensively and I can tell you that. And you can’t do that if the banks don’t have the finance.
Now, back to your question of where the profits of the banks come from, go and check, the funding of the real sector by the banks is less than five per cent. So, their income is not coming from sound lending. It is coming from transactions. So, most, if not all the banks have become very transactional in their operations. And this means that if there is no need for them to engage in sound lending, they are backsliding in training and capacity building for their people because there is no point training their staff again because computers are doing the work, POS’ are doing the work. Transaction is the name of the game. So, that trend needs to be reversed to make sure that interest on loans is what generates their resources.
We need a well-funding banking system for this economy to be reflated. And that is why this colloquium is key and fundamental. I believe very strongly that it is going to be a game-changer and the banks that understand the times we are in will take full advantage of the opportunity.
So, who is Jeff & O’Brien and what is the very idea of this colloquium?
Jeff & O’Brien is an international Africa-focused knowledge development firm. We believe that knowledge is at the core of the issues of Africa. And we conduct international training programmes for banks, financial institutions, oil and gas companies; and our faculties are drawn from around the world. We have operating centres in Lagos, London, South Africa and the United States.
The essence of this workshop, the fifth in the series of our round table concepts, is that Jeff & O’Brien picks a topic of critical and national interest and superintends knowledge thoughts on such, bringing deeper understanding of what the issue portends not only for the sector but the larger Nigerian economy.
We have done round table on private banking that enabled banks at the time to appreciate what core private banking entailed and what opportunities are therein as a banking sub-sector. We have also done round table on PPP infrastructure finance. We have also done roundtable on retail banking because we figured at that time that retail banking was beginning to be very sectorised and we felt that there must be a deeper way of understanding what retail banking means for our environment.
Who is invited to the workshop?
As you can see from the colloquium title, “Bank recapitalisation and value creation strategies,” this is mainly for the banks – chief executive officers, chief finance officers, heads of strategy and anyone that that will be part of the new face of the banking industry.
One of the critical things we also want to present at this colloquium is that it is not just recapitalisation. We also want to look at the value addition in the banking industry. What is the added value they bring to the table? And it is that value that positions them in a strategic way either as a partner or in a merger and acquisition scenario.
But there is another group of people that will find this workshop very useful and they are the financial lawyers – that is lawyers who will assist the banks to position themselves legally to take advantage of the opportunities because there are a lot of legal implications of consolidation and recapitalisation.
Capital market operators will also find the workshop useful. These are the people who will serve as critical engines in hand-holding the banks in organising, transiting from where they are now to where they want to be. Those companies that are known to conduct mergers and acquisitions, and know how to take companies to the capital market and assist them to access the kind of funds that they require in order to be able to recapitalise. The key thing here is that this has been done before.
Finally, how hopeful are you for Nigeria’s economy considering where we are now?
I am an eternal optimist and what that means is that I always look out for the silver lining in every cloud. If politicians walk their talk, then there is hope because if you listen to what they are saying and they are really saying all the right things. But my concern is the quality of execution. For instance, a few days ago, the president said the cost of drugs was skyrocketing due to the exchange rate crisis and they want to see how they can bring down the cost of drugs and I say that is a very myopic way to look at the economy. Cost of drugs is just about one per cent of the issue. Cost of food has skyrocketed, cost of seedlings is high, cost of transportation, cost of living generally. So, I think they should be a lot more holistic in proffering solutions. Recapitalising the banks is good but it is just one thing of the many things that need to be done.
Unfortunately you cannot repair the economy without repairing the politics. It won’t work because it is the mind-set, the philosophy of the politicians that drives the economy. That was why the last election was very heated.
But that said, I am hopeful that those in authority now will rise to their responsibility. We are getting some good signal from the Minister of Interior despite the scandal from the Ministry of Humanitarian Affairs and Poverty Alleviation. All the ministers must be made to understand that this economy will not grow if they don’t grow it.
Just as Tinubu said, at the end of the first quarter of his four-year tenure, he should fire ministers who are not performing and that will send a very strong signal that he means what he is saying so that the rest will sit up.