1. The Nigerian economy is undergoing agonizing recession which may be longer than anticipated. As a Risk Management expert, what in your opinion has been the banks' experience as different from a period of economic growth? Would you say that generally, banks have lived up to expectation?
The decline in global oil prices has negatively impacted Nigeria’s economy, driving major macro-economic variables southward. As you are aware, the economy is in a recession with gross domestic product (GDP) contracting by 2.24% in the third quarter of 2016. This is the third consecutive quarter of negative growth after the GDP shrunk by 0.36% and 2.06% in the first and second quarters, respectively.
As you rightly observed, the recession may be longer than earlier anticipated due to the dwindling government revenues on account of the lower oil prices, depreciation of the Naira that induces a higher cost of imported intermediate inputs, contraction in consumer spending and purchasing power, among other factors.
Unlike period of economic growth, the current recession has affected the performance of the banking industry negatively as banks do not exist in isolation of the larger macro-economy. Banks have had to contend with rising Non-performing loans (NPL) ratios and higher levels of provisioning due to weakening capacity of a number of loan obligors to meet their obligations as and at when due. This has also had negative multiplier effects on some other prudential ratios for banks, such as the loan to deposit ratios and capital adequacy ratios (CAR).
In addition, Banks are facing some pressure on their foreign currency denominated exposures which have been further aggravated by the devaluation of the Naira while contending with contraction in margins and spreads.
While there may be varied opinions on whether Banks are living up to expectation, I believe that Banks are constrained by the recent decline in the country’s macro-economic fundamentals. Therefore, Banks must evolve and adopt strategies that will enable them to cope with the current economic challenges. However, banks have continued to provide tremendous support to the government through the attraction of foreign investment, while also working well with the Central Bank of Nigeria (CBN) to effectively manage relationships with correspondent banks in the wake of the significant trade arrears that were not resolved until June 2016, through forward transactions.
2. How would you describe the challenges before a Risk Manager at this point in time as against that of a borrower? How can lending assist to overcome an economic recession?
The principal responsibility of a Risk Manager is to ensure minimization of losses that may arise from risk taking activities. At this point in time, the challenges facing a Risk Manager are the likely revenue contraction and asset quality issues in an environment of potentially weak credit growth. The default level on loans is quite high. Other challenges include the impact of another round of devaluation of the Naira on prudential ratios such as CAR and NPL ratios, cost of risk amongst others. The economic environment has also resulted into challenges for most borrowers. For example, most of the Fast Moving Consumer Goods (FMCG) companies quoted on the Nigerian Stock Exchange (NSE) recorded decline in turnover ( as a result of the reduction in effective demand for their products) and dwindling profitability in the reported accounts for 2015, compared to prior year.
While lending can assist to overcome an economic recession by jump-starting incremental economic activities, the current weak economy and the level of NPLs have made Banks not to be particularly bullish in growing their exposure to the private sector. However, to engender more lending to enterprises and companies, at reasonable and reduced interest rates, targeting MSMEs, agriculture, power and non-oil exports which will aid economic growth, the CBN needs to consider more incentives for Banks.
3. Are there any incentives from the government to encourage lending in this current recession?
It would be recalled that in a bid to inject more liquidity into the system and encourage lending, the CBN lowered the cash reserve requirements (CRR) from 30% to 25% in October 2015. The following month, citing concerns that the lower CRR had not sufficiently improved credit delivery, the CBN further reduced the CRR to 20% with a caveat that the liquidity (from the 5% reduction) will only be released if Banks agreed to increase lending to targeted sectors. However, observing heightened activity in the interbank market and lackluster lending growth, the regulator admitted that previous efforts to reflate the economy had not elicited the required response, and reversed course by raising the CRR to 22.5% in March 2016.
The major noticeable direct incentive provided by the Government is in respect of the MSMEs particularly within the agriculture sector. Consequently, many Banks are currently considering the growth of their portfolios of MSMEs leveraging the incentives provided by the CBN to mitigate the inherent risks in this sector.
4. For an economy that was struggling to propel its MSMEs prior to recession, what would you say is the fate of budding enterprises?
The quest to empower MSMEs, especially by financial institutions, has gained traction in the last few years largely driven by the significant untapped growth potential of the sector as well as incentives provided by the CBN to reduce the risk of lending to this sector. While MSMEs are generally more vulnerable in a period of economic downturn, it also provides an opportunity to deliberately develop this sector considering their potential to contribute significantly to employment generation, wealth creation, poverty alleviation and improved food security.
It is imperative that a conducive environment be put in place, which should include proper management and timely release of funds as well as formulation and implementation of appropriate policies in favour of MSMEs. One of these policies could be the tax or duties structure, which could be skewed towards encouraging private sector participation in MSMEs.
The need for more affordable and accessible means of funding for the MSMEs cannot be overemphasized considering that the microfinance banks have not been effective in achieving these objectives. It is instructive to state that part of the 10-point agenda unveiled by the Minister of Finance to pull the country out of recession includes the growth of MSMEs through specific measures to improve capacity and access to finance. These include the setting up of a Development Bank of Nigeria (with a capital base of US$1.3bn), increase share of business awarded to MSMEs from Government contracts as well as tax incentives.
5. Considering that risk analysis would have taken a different dimension due to this economic downturn, how can both lenders and borrowers adjust and mitigate risks successfully?
As a result of the economic downturn, both lenders and borrowers will have to run leaner, more cost-effective and efficient operations. They will have to put in place strategies to retain and broaden customer base through top quality customer service delivery, better manage relationships with the critical stakeholders including employees and improve general business practices.
6. What are the basic roles of credit bureaus at this period of recession and what in your opinion has been their performance in Nigeria?
The role of the Credit bureaus in a period of recession include the following:
Credit Bureaus have performed relatively well over the last couple of years. They have enhanced the quality of loan portfolios of banks and have also helped to create an improved credit culture in the country. They have also introduced innovative products to the market and I expect that the value adding process will continue in the future.
7. Considering the fact that Nigerian GDP for Q3 slides further, what can MSMEs do to outlive the economic downturn.
MSMEs have to be strategic in developing their business model and factor in economic and environmental issues. It has been proven that most entrepreneurs are deficient in business and technical skills; hence there should be more focus on training and capacity building for the MSMEs.
Considering Nigeria’s huge and growing population and the sector’s potential to diversify and transform the economy, more concerted efforts are required from Government in the areas of access to funding for MSMEs as well as appropriate institutional framework and policies to enhance sustainable private sector participation.
8. In spite of the challenges of the economy, particularly the forex fluctuation and shrinking GDP, are there any windows of opportunity for MSMEs to explore?
The MSMEs can explore the various financial incentives available to them from the Government such as:
In addition, some Banks have dedicated desks to support MSMEs and enable them to have access to funding other than the Government sources. For example, Ecobank Nigeria has a foreign loan of $10mm from European International Bank (EIB) for on-lending to SMEs. The Bank also has an agreement with AFD (French Development Agency) and German Development Agency with a view to providing funding for renewable energy amongst others.
9. How would you project the first Quarter of 2017 for businesses, both MSMEs and business conglomerate?
I do not expect massive changes in the economy and overall business environment in the first quarter of 2017. Consequently, both MSMEs and business conglomerates will still have to grapple with some challenges in Q1, 2017. However, the reflation of the economy through budget implementation, coupled with the expected stability of crude oil prices ( at the $40-$50 range) during the year, should result in gradual pick up of the economy from the second quarter of 2017.
10. What do you think should be done to accelerate return to economic growth in Nigeria and how soon do you think it will take for the Nigerian economy to pick up again?
In the immediate term, it is imperative that the Government continues to work on enhancing the quantum of crude oil production, while the initiatives aimed at resolving issues in the Niger Delta region should be promptly implemented.
The timing of recovery of the economy will depend on both exogeneous and endogeneous variables. From the external perspective, the actual crude oil prices compared to the budgeted figure of $42.5 per barrel would have a major impact on revenues, GDP growth and timing of recovery. The endogeneous variables will be largely driven by how well the government is able to manage the issues highlighted above for the acceleration of the country’s economic growth.. Overall, I am cautiously optimistic about the Nigerian economy and anticipate a marginal growth in GDP for the country in 2017.
11. How would you like to describe your experience as the Chairman of a foremost Credit Bureau in Nigeria?
My experience as the Chairman of CRC Credit Bureau has been challenging but quite interesting. The strategic intent of the company remains to be the leading credit bureau in the country. The recent launch of Silverblade 2.0 technology platform marks a significant milestone for the company. The company is currently leveraging this platform to provide seamless, first class services to our valued customers and we expect that this will translate into higher revenues and profitability. The Board has a clear vision of the future for the company and the management and staff of the company have continued to work as a team to realise this vision.
12. What is your vision for Credit Bureau operation in Nigeria?
My vision for Credit bureau operation in Nigeria is for the credit bureaus to continuously engender a strong credit culture in the country, with a view to ensuring stability and growth in both the financial services sector and other relevant sectors of the economy