The Nigerian banking sector is undergoing a transformation, triggered by a central bank directive last year increasing the minimum capital requirement for banks from N2bn ($15m) to N25bn. It is causing an industry-wide shake-out that is set to reduce the number of banks from 89 institutions – mostly weak and under-capitalised – to around 20 by the cut-off point at the end of this year.

Central bank governor Charles Soludo weathered fierce criticism from within the industry, mostly from those who had grown accustomed to easy profits on government debt. But he has never wavered, insisting that a strong, well-regulated banking sector is crucial to Nigeria’s economic development prospects.

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Attractions

Bold and determined action from the central bank, allied to the broader reform programme, was among the reasons that convinced Standard Chartered to meet the new minimum capital requirement. “We were the first international bank to comply with this requirement and have now injected a further $140m into our business operations in Nigeria,” comments Sherazam Mazari, CEO, Africa at Standard Chartered Bank. “Before this requirement came into force, we had $50m in capital there.”

With the additional capital, the bank intends to expand its product line and increase the number of branches in the country. “Our business operation [in Nigeria] is one of the fastest growing businesses within our global network,” says Mr Mazari. “To support this growth we have to invest in areas such as technology and premises as well as talent development and skill-building programmes.”

The company is working on several new product initiatives in both the corporate and consumer banking sectors. It acquired a portfolio from ANZ Bank in 2004 and with the acquisition came corporate finance skills to service the country’s oil and gas sector.

“We are now able to leverage these skills to strengthen our product offering to our corporate clients in Nigeria,” says Mr Mazari. “As an international organisation, we are also able to bring in new skills in the areas of cash management, trade, lending, corporate advisory and other value-added global market products from our international network. These are important developments given the huge demands and plans Nigeria has for developing its oil and gas sectors.”

Meanwhile, on the consumer banking side, the bank has recently launched a small and medium-size enterprise (SME) banking financial proposition to meet the needs of this fast-growing sector in Nigeria.

Standard Chartered has five branches in three major cities (Lagos, Port Harcourt and Abuja) and is reporting strong country performance. Double-digit growth has been recorded for the first half of 2005 and profits are growing by 50% year on year.

A wider commitment

Nigeria offers many opportunities, says Mr Mazari: “The size of the economy is a major advantage – Nigeria has over 20% of aggregate GDP in sub-Saharan Africa. The government has taken extremely positive steps to try to gain investor confidence through areas such as governance, standards and financial sector reforms.”

However, the banking system is still fairly underdeveloped. Consumer loans represent just 1.3% of GDP compared with about 15%-17% in the Asian market and even more in the European market. Corporate assets are between one-fifth and one-third of the size of Asian markets in terms of the percentage of GDP. So, there’s a lot of opportunity for growth in the credit market.

Standard Chartered Bank’s position as a global player also makes Nigeria an attractive proposition. “The bank has a strong presence in Asia, the Middle East and Africa, so is well placed to create a bridge for trade links between Asia and Africa,” comments Mr Mazari. “After all, $33bn of trade is conducted between Asia and Africa. And, of this, 22% involves Nigeria, so we’re uniquely positioned to help on the trade corridor.”

Risks are attached to investing in Nigeria, but Mr Mazari believes the political risk has improved in recent years. “The government, finance ministry and president have done an outstanding job in changing negative perceptions about the country. But such perceptions will take some time to rectify, so they still need to work on it,” he says.

“However, what’s most important in Nigeria isn’t so much the political risk but the overall business climate – taking into account areas such as the complexity involved in listing or starting a new business, hiring and firing, and acquisition of properties.”

Mr Mazari would like to see reform that will assist the growth of SMEs: “Taxation and incentives are important, but the most important thing is how to make the business climate in the country more attractive to SMEs. Larger companies can always cut through red tape, but SMEs will find it too costly or too challenging. This is where improvements could be made. However, the government has indicated that it will reform and work through priorities. Legal reforms are in place and the government is open to suggestions.”

This openness is a strong advantage for the country’s progress. Mr Mazari comments: “The fact that the government is open to suggestions and we can talk to them is positive. If we come up with a set of suggestions, we know they will be considered. For example, how can we manage interest rates so that Nigerians can get access to credit from banks? If this can be achieved, the unbanked population can be served by banks.”

Range of challenges

Banks in Nigeria face a range of challenges, both country-specific and industry-specific. “Infrastructure has been a historical challenge,” says Mr Mazari. “Real estate is very expensive. Electricity is lacking but, because we’re used to dealing with such issues in Africa and Asia, generators are not a problem. However, it’s absolutely essential to bring the private sector into power to improve the reliability and amount of power available.”

One of the biggest challenges for banks is that the interest rates they can charge on credit is capped. “Historically, high interest rates driven by inflation on one end and caps on the other result in loan margins that do not cover risk premiums,” says Mr Mazari. “If the government reviews the rate caps, and the inflation rate and interest rates come down, we can expect a spurt in both consumer and corporate assets. Spreads must cover risk premiums which are higher in markets where there is a preponderance of first-time users of credit.”

Available talent

The bank employs more than 200 people in Nigeria – predominantly local workers with two or three expatriate staff – and is set to expand further.

“The availability of professional talent is outstanding,” says Mr Mazari. “However, if you want to continue to lead the way and be a market leader, you do have to bring in product expertise from outside, because you won’t find that level of expertise locally. So our approach has been a combination of leveraging our pool of expertise from our global network of staff and sending them to Nigeria to train the local team there, and bringing out local talent for secondment to our business operations in the more developed markets within our network.”

Around 4% of the company’s human resource budget is allocated to such training and development programmes. “In Nigeria we obviously spend more than that, as we see the country’s potential as a growth centre,” explains Mr Mazari.

“It is important to understand that talent development is a long-term plan, and that it forms an important part of our strategic agenda alongside the repositioning of our wholesale and consumer banking business to a higher level in Nigeria.”