Okonkwo: Nigerian Banks Have Requisite Human Capital
The Managing Director/Chief Executive Officer of Fidelity Bank Plc, Mr. Nnamdi Okonkwo, in this interview on ARISE TV, the sister broadcast station of THISDAY, spoke on the recently introduced Real Sector Support Facility as well as on a wide range of issues in the banking industry and the economy. Nosa Alekhuogie and Nume Ekeghe provide the excerpts:
Some have said the Central Bank recently introduced the Real Sector Support Facility (RSSF) because the bank did not have the capacity to lend to the critical sectors of the economy. What is your take on that?
Well it is interesting for them to have said that. Banks, in every situation that has to do with the economy, would take the bashing. I find it interesting that they talked about the internal capacity of banks. Talking about capacity, I think we need to break it down to what we mean about that. I will take it from three perspectives. What do banks do basically? Financial Intermediation. So, we take money from the surplus segments of the economy and pass it on to the deficit segments. Basically, we take deposits and give loans. Now, do we have capacity to do this? Yes, but there are other dimensions. Now, we take it from the liquidity perspective, which means that you are liquid enough to continue in this financial intermediation process. If I go to liquidity, what that is simply talking about is your ability to have enough liquid funds to continue to lend. And that is why the Central Bank has liquidity ratio for banks. We also have the cash reserve requirements (CRR), which is also a liquidity management tool. Excess liquidity in the system portends danger. For instance, it can make a lot of funds available for people to speculate in the foreign exchange market and there could be pent up demand for foreign exchange which can lead to devaluation. So, in terms of liquidity, Nigerian banks are liquid, which in the first place, was why the issue of CRR came about. CRR simply means that for every one naira from deposit that you keep as a bank, the central bank keeps 22.5 per cent. And over time, this fund has built up and banks have been agitating for its release so that we can carry on with our business. The regulator obviously, was resisting that for a while. And part of the federal government’s Economic and Recovery Growth Plan (ERGP), is to make sure that lending in the real sector, especially manufacturing and agriculture is improved. And the issue became challenges like interest rate and so on. Now, the central bank came up with this creative way to say ‘banks, if you want me to give you some of your liquidity, I will do so on the condition that you extend long-term loans to manufacturing, agric and the real sector.’ And for that reason, they pegged the loan at nine per cent. So, instead of having these funds sterilised at the CBN at zero interest rate to the banks, it is a stimulus for banks to go ahead and lend our funds with the central bank at nine per cent, minimum tenor seven years and then you give moratorium of two years. So, from liquidity perspective, you can see that the banks are liquid enough. Now, if I go to capital adequacy, the Nigerian banking industry, the capital adequacy ratio average shows that we have the capacity, of course, they may be one or two players who occasionally might have challenges in that area. But the regulatory framework for regulating banks ensures that at every point in time , the regulator keeps an eye and makes policies that continues to make banks strong enough in terms of capital adequacy ratio. If you recall before the end of last year, the central bank came out with a rule that if you do not have the required capital adequacy ratio, you cannot pay dividend. So, that forces you to retain more earnings to build up your capital buffers so that you continue to lend safely. Capital adequacy ratio as you may know, there are different requirements for different categories of banks. For the tier 1 banks, it is 16 per cent, for any other bank with international banking licence, it is 15 per cent and for banks that have only national banking licence, which means they are operating in Nigeria alone, that is 10 per cent. So, if you look at it, you would see that from regulatory framework and from the individual banks’ capacity, we have the capital adequacy ratio to continue to lend in this area.
Did you get a sense that, that was one of the areas in which you felt there was lack of capacity?
I wanted to speak about it from three points. People have to first of all understand what banks do. Now, we have talked about capital adequacy ratio. The next one I would like to talk about is when you are the manager of other people’s funds, do you have the human capital capacity to do that? And my answer is yes, in the Nigerian banking industry. I would tell you why. Most of us running banks today, started in the late 1980s and early 1990s, when merchant banking was the main thing and merchant banks were the banks who used to lend mainly to manufacturers and the real sectors. The traditional banks in those days especially the big four, if you notice, they were all so heavy in agriculture and had the competence, track record and history of lending to that segment. So now, most banks have grown especially with the recapitalisation of 2004 and the shake-up of 2008. So, the industry is in a stronger position today to lend. But the reason you would not finance manufacturing businesses before now goes beyond banks’ capacity from that perspective of human capital. The risks, how about the general macro issues that would hamper a company’s ability to complete its asset conversion cycle and repay your loan?
We have seen bad loans in the bank a lot of times. Now that it is single digit and for two key sectors of the economy, what is making it different?
What is making it different is, imagine somebody who produces plastics and he borrows at 20 per cent and above. He has his own power station and the transportation of his goods, say from the south to the north, is more expensive because of poor infrastructure. By the time he puts together his cost of business, he might just find himself with cost of goods to sale ratio of maybe 90 per cent and this 10 per cent margin is not enough to accommodate other costs. So, he would operate at a cost at a loss. I will give you an example, in the past, when I was in corporate banking in the early days, I used to be in charge of plastics, flour mills and the vegetable oil industries. We had a kind of waving motion in terms of sales in some of those plastic companies. During the rainy season, when their sales drop and you ask them why, they will tell you that people who come in from Chad and other neighbouring countries that buy their goods, stop coming during rainy season due to poor infrastructure. So, at that point, if these companies produce, you cannot really achieve the same kind of volume of sales. Now if cost of producing is that high and disposable income of those that buy is lower, then definitely production in the manufacturing sector would drop. So, what I’m trying to say is that beyond the banks’ capacity, there are bigger macro-economic challenges that hampers lending to the real sector. If you lend money, you expect that money to be returned to you so that you can lend to the next person.
In today’s world, do you believe that the banks still have the capability to work in the agric and manufacturing sector and haven’t lost that competence?
We are actually in a stronger position today to do that but because if you lend at the rate that you should lend based on your own cost of funds, then it would not be profitable for them. So now you have funds available to lend at nine per cent, which is about 11 per cent drop in cost of funds, compared with about 20 per cent which you would have lent to the sector, which makes it easier for those companies. So, the issue is not capacity for the banks. Now, most banks today meet international standards in terms of practices and human capital development. I’ve worked and run a bank in Ghana, I supervised in Sierra Leone and Liberia and in all these countries, I can say Nigerian banks have demonstrated that we have the requisite human capital. In our days, you do not resume the bank if you do not go through training school for three months and today most of the banks now have their training academies where you develop people. So, we have the capacity in terms of the human resources, capital adequacy ratio and liquidity.
With the way banks have been able to develop capacity and training, why do you think this hasn’t cascaded to other parts of the economy?
If this was not a private enterprise, Arise TV will not be making the type of impact it is making today. Clearly in Nigeria, the private sector is leading. We meet international investors, they come and put money in our companies because they see that we have the right governance and right human capital to run those businesses. We have international standard governance to run businesses in the private sector.
If we do well in terms of lending to these two sectors, automatically the economy will do better. What are your expectations for foreign direct investment ( FDI) and is it an enabling environment for businesses to grow and thrive?
It is a chain effect. Remember, when Dunlop left Nigeria and when Michelin relocated to Ghana, they did not do so because banks did not have the capacity to lend money to them, but the macro environment drove them out of the country. So, now with things like the ERGP and interventions from the agric sector, the N220 billion fund in micro, small and medium-sized enterprises (MSMES) and all of that and if the big manufacturers come alive, there are value chain opportunities for even small manufacturers to tap into. So, if you have companies operating, it is easier and safer to lend to these types of companies in manufacturing and corporate level that we are talking about.
Do you think it will automatically make the macro economic factors better?
Yes. But remember there are guidelines. It has to be something that is local like backward integration, it has to be preferably foreign exchange generating. So, ultimately, that means you are going to hire more people to work in these factories, that means employment rate would improve, that means disposable income would improve, that means quality of life would be better for more people. It has a chain effect. It makes those companies more attractive when they are in full capacity production for foreign investors, for instance, for them to even issue corporate bonds and have people subscribe.
Corporate bonds being backed by the CBN is also part of the policies and lots of people don’t talk about this. Is it because people see more opportunities in the lending part and not in the bonds?
Well for you to issues bonds, you have to meet certain rigorous standards and proper accounting. So, if a manufacturing company that had been comatose in the last five years comes alive today on account of this intervention, by the time they operate overtime, they would have convinced bond investors to invest in their bonds. Now, there are existing companies today that actually qualify. So, it is left for those companies to come to the market and access this opportunity.
We are talking about this today because CRR involves direct lending. But bonds are instruments that investors would invest in. From the banking perspective, we are focusing on the CRR part and then from the corporate, they would then have to access the market with this opportunity and issue bonds following the guidelines of CBN.
Do you see today that there are enough companies in the manufacturing and agriculture space to take advantage of this new liquidity?
I don’t know about enough, but there are companies. The other thing is that for corporate bond issuers, the opportunity space has just improved and the likes of the flour millers, the beverage companies, many of them can access that market.
What has been the response to this new CBN policy by the manufacturing and agricultural sector?
It has been massive. Just on Wednesday, we submitted quite a number of applications. There is a rice, mill which is one of the biggest in the country we had been supporting when nobody would touch them. The CBN is very serious about this to the point where it is following up with what we are doing in that area. In our risk committee, we just compiled a list and we are already making moves and very soon, and I’m sure most of them would begin to access these funds.
When you talk about risk framework for businesses who want to access these loans, what exactly are you looking at?
Remember banks do not operate in isolation, we are heavily regulated and there are sanctions for infractions. So, you must have a robust and solid risk management framework which is what we have. We can’t just jump out and start lending. There are processes you have to go through certain analysis from unit level to divisional levels to management credit committee level and then board credit committee level, depending on the amount. All of these are checks and balances and the regulator would also play a role in making sure you do not take excessive risk. That is why they have examiners coming to inspect you once or twice a year, depending on composite risk rating.
This brings us to Fidelity Bank’s SME focus. Can you speak more on your SME focus?
SMEs is a major focus for Fidelity bank. It started about seven years ago when we decided to look at SMEs from a different perspective. We have general SMEs and then we have managed SMEs. We have a division headed by a general manager that looks at managed SMEs. We help SMEs build capacity, give them access to markets and also educate and help prepare them for qualification to borrow. We have an office where you could work in and they would look at your business and then help you with tools like simple book keeping and so on. And so, over the years, we have seen a massive growth in our SME numbers and our SME loan default rate have been very low because of this approach.
What rate do your bank give out your SME loans?
They are at commercial rate, but the problem of SMEs is not necessarily just the rate. Today, if I’m an entrepreneur, I could start a small business on this street but if I do not have the capacity to manage businesses and I don’t understand book keeping, it could affect the mortality rate which is very high for SMEs. So that is where Fidelity comes in to help them know those things you need to do upfront so that your business would grow. If you look at Admiralty way or Adeola Odeku street, when those malls opened, everyone took shops there but if you go there now, a lot of those businesses have died and for those people who took on those spaces, it was because of the lack of capacity. And that is why further on our SME plate, we have taken beyond Fidelity, we have partnered with the Enterprise Development Centre of Lagos Business School (LBS), to collaborate and develop SMEs. We have also partnered with Nigerian Export Promotion Council (NEPC). Again, in two weeks or so, we would be commencing seventh stream of export development program, where we train SMEs in collaboration with LBS and the NEPC and we have had testimonies from this program.
So are the SMEs are responding?
They are responding. That is why we get stronger. It is not just about you coming in to borrow, we support you to develop. And that is why also the N220 billion SME fund we accessed N2.6 billion and we have got repayments now of about N1.2billion and our NPL ratio in that area is far below the threshold of five per cent. If you have been following the news, we celebrated some of them. That is the water manufactures in Ondo, Kano, Aba, Onitsha and all across the country. So, SME is something we are very passionate about. When people mocked us saying we would lose money, seven years on, our NPLs for SMEs are not anywhere near worrisome.
You have taken a special interest in SMEs. As a bank, what is your retail strategy?
Retail is another light bulb in our bank. In 2013, just before I became CEO, we had to look at our strategy and we decided that our retail play would be supported by very strong digital strategy. Because if you are going to do retail and you are thinking of brick and mortar you would not work. So, we had to use technology to drive retail. I would give you some statistics. Today, we have 4,306 PoS machines deployed, we have 788 ATMs, we have two million cards issued, 1.5 million mobile subscribers. In 2013, we only had 54,000 mobile subscribers and today it is 1.5 million.
How many transactions are you doing on the mobile banking platform and what is the percentage of this with all your transactions?
Today, we are at what we call digital migration. By the way, in past we used to build about 15 to 20 branches yearly. Now, we do just about two or three branches yearly because of digitisation. So, to answer your question, today 80 per cent of our transactions are driven by technology and that is why if you go to our banking halls they are not as busy. I’ll tell you a stor. Usually, I do visit our branches and one day I walked into one of our branches at 8.15am and I asked why there were not a lot of people and they responded that funds transfer officers are not needed because customers can do them on their mobile phones. So, we have redeployed them and trained them for different parts in the bank. So rather than lose their jobs, as our business is growing we retrain them. So that is what happens when you digitise.
So, if 80 per cent of your transactions are enabled by technology, what are some the areas you need to respond to in this digital age?
Another thing we have done is that we have created something called a Digital lab. We hired 28 young people between the ages of 21-24 years and have sent them for training for about two months and we have quartered them on Awolowo road and we just gave them the wings to fly. These are people who develop applications and we have taught them our strategy as a bank and they understand what we are doing. So, these young people are strengthening our digital platforms. We recently launched an APP whereby when you are chatting with your son for example and he needs money I can just click on the Fidelity logo and then transfer funds to him. So, I can go on and on, but it is something that excites me.
How are banks looking at Fintechs. Last week we had a gentleman whose company had just raised $8 million for their payment gateway. How is your bank looking at this space, are you collaborating and how is it being integrated to traditional banking?
Given all I have said today about digitisation, if you ignore Fintechs, you would do so at your peril. So, banks should rather collaborate with them at this point. From what I am describing, I don’t know who made that quote, but I agree with him when he said that banking would always be needed but that banks would not always be needed. So, what that means is that people are going to do banking but not necessarily in brick and mortar banks. So, what we have done is that these young boys and girls are going to develop the kind of apps we would need. So, rather than have them seat in one room and using their knowledge to do internet fraud, we are giving them employment and wings to fly. So, we are collaborating with Fintechs to make sure we provide banking services.
What do see in terms of Fintech application and regulations?
Banks are heavily regulated. Anybody can be a Fintech company. So, you are doing banking, but you are not regulated by the CBN. So, a major imperative to protect all of us from cyber fraud and things like that, is to also develop a very solid framework for Fintechs. So, you can do financial services, but you should subject yourself to regulations.
