“The truly creative changes and the big shifts occur right at the edge of chaos.”
These are words by professor Robert Bilder which ring loudly in every new phase of evolution that one experiences in financial systems. Nigeria has experienced periods of aridity and tumultuous conditions, which reshaped the face of finance in the country.
The Pressure To Innovate
Nigeria’s relatively significant exposure to the oil and gas sector increased pressures on balance sheets and operations. Whether for survival or the pursuit of market leadership, many banks have been encouraged to innovate. FirstBank recently partnered with Uber Nigeria to provide low-interest, used vehicle loans for top-rated driver-partners. Diamond Bank established an equally impressive partnership. Its collaboration with MTN, Intel, Microsoft, and HP supported it in providing not only finance but also solutions that transcend traditional banking services, thus equipping SMEs in the country with the necessary tools for facing the dynamic business environment of Nigeria.
Access Bank has strengthened ties in a similar collaborative effort with PayWithCapture, a digital solution that enables the transfer of funds from multiple bank accounts on one platform. Fresh on the scene is Lydia, described by Bloomberg as Nigeria’s first online-only lender. While innovation spurs growth, encourages competition and proves itself as essential for survival in our increasingly rapid business environments, core principles of banking and finance should not be ignored.
Although many studies on the relationship between the structural elements of the banking industry and its impact on performance have not been conclusive, a form of certainty and structure remains pertinent for the relative success of Nigeria’s banking sector.
With certainty comes investor confidence. The Nigerian banking reform promoted consolidation (from 89 to 25 banks between 2004 and 2006) which reduced costs. As a result, the ease of access to a larger proportion of the unbanked population increased significantly. This contributed to the annual increase (by 59%) of total banking assets from 2004 to 2008. In August 2009, the newly appointed central bank governor initiated reforms to increase accountability and transparency.
In typical fashion of many banking industries, many of these reforms have been welcomed while some other approaches to policy making have been received with criticism. A balance must be reached in the regulators’ approach to banking and finance in Nigeria, especially in an era where great prospects are made possible technological innovations.
The structure of the Nigerian banking sector can be best described as an oligopoly. The profitability of the Nigerian banking sector as measured by return on asset was significantly better in the pre-consolidation period (2001-2004) than in the post-consolidation period (2005-2010). The most profitable banks in these periods, however, tended to be those with the largest market concentration. More competition should be encouraged by policy makers responsible for monetary and financial stability. In achieving higher levels of competition in the market, financial costs can be reduced, and economic efficiency increased.
Continued market-induced consolidation harbours the potential to increase the profitability levels of banking units in the sector. Without a doubt, technology will play its part in ensuring that the goals of visionaries in the Nigerian banking sectors are reached. Unconventional (and even dangerous) as it may seem, blockchain technology may be the solution to many challenges faced by the Nigerian banking sector.
Antiquated models for growth could be superseded by a technology that holds prospects of increasing profits of clients of banks by 30% and making their payments faster, easier, and cheaper. Anti-money laundering and fraud practices can also be enhanced by the integration of cryptocurrency technologies into banking operations.
For now, it may simply be wishful thinking as other opportunities present themselves with greater scope for faster-realised profits. A report by Ericsson shows that over 40% of the Nigerian population (of over 170 million) is still unbanked. With middle-income households rising at favourable rates, the potential for capacity building in not only consumer banking but also business banking is outstanding.
However, as always, risks must be considered. Policy inconsistencies and lack of human capital remain key issues which many banks across Africa. This makes expansion into other African states a significant challenge for Nigerian banks. United Bank for Africa (UBA), in an exemplary manner, managed these risks by engaging the Nigerian government in successfully negotiating with their Kenyan counterparts the framework to establish rules/regulations for companies to deploy staff in other countries.
Banks operating in Nigeria have faced the risks rooted in the nation with a clear understanding of the incredible rewards to be gained through the tenacity and creativity. In the words of the Heirs Holdings Chairman, Tony Elumelu: “High Risk, High Reward.”