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 Industry
Pre-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 Industry
Pre-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 Industry
Soludo 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 Industry
Soludo 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 Industry
Soludo 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 Industry
Opportunities
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 Industry
Opportunities
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 opportunities
7. 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 Industry
Opportunities
1. 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 Industry
Opportunities
4. 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 Market
Opportunities
1. Creation of new types of financial
instruments
2. Trading in options and futures
3. Creation of a market for long term
government and corporate bonds
4. Efficient Registrar services
5. 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