Larbie: Producing Locally is a More Sustainable Business Strategy

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Managing Director/Chief Executive Officer of Rand Merchant Bank Nigeria and Regional Head, RMB West Africa, Mr. Michael Larbie, in this interview stressed the need for increased support for local production. ObinnaChimapresents the excerpts:

Why did Rand Merchant Bank decide to issue an N80 billion Commercial Paper?
As part of our funding to support the bank and our activities, we seek to employ a variety of options and CP is certainly one of the options that allow you to do that. So, we are quite excited to do that. It is going to be part of a package of funding solutions which would include a bond issuance and a bond programme which we are basically working on, in addition to corporate deposits that we have raised. But we believe CP is efficient, quick to do and more importantly, it is shorter and aligns with the short-term businesses that we do. We think the market environment and the work that the FMDQ has been doing in ensuring transparency in that market and ensuring good investor appetite and education, have all come together to give us confidence to do that.

Did you consider cost?
Absolutely, we did consider the cost. Ultimately, when we raise this type of funding, we add it to our available funding already and obviously use that to support our lending to clients. Certainly, cost is very important to us and that was considered.

Would the bond programme be dollar-denominated?
Our bond programme would certainly be a pure naira programme. It won’t be a Eurobond programme. That is because being part of a global group –the FirstRand –we are able to source dollars from FirstRand when we need them. So, there is no immediate need to issue a foreign currency bond. But, when the opportunity comes, we would consider it. But our group does it for us. So, when the group raises funding in the international market, they consider our activities also.

But I think on a broader basis, the appetite for Nigerian issuances has increased in the international market. You are aware that the United Bank for Africa Plc recently tapped the market, Zenith Bank also tapped the market and the federal government also tapped the market for a 15-year paper, which was priced very efficiently. So, we believe there is good investor appetite for Nigerian paper.

Increasingly, given the challenges we have gone through in the foreign exchange market, I think as banks, it is important that we also reflect carefully on the clients that we are lending dollars to. It is important that the dollars are lent to clients who are generators of dollars. And when they are not generators of dollars, we need to be comfortable that they are able to source the dollars to repay. So what we see in the market is re-balancing between clients borrowing in naira and borrowing in dollars. A lot of the activities, clients now want to borrow in naira to fund the activities. That is actually a good thing. Obviously, rates at the current level seem high. But as rates normalise given that inflation is coming down, clients would be more encouraged to borrow in naira, which is good.

With your capital raising programme, are there specific infrastructure projects you are investing in?

We are quite engaged in the power sector. We see pockets of opportunities in the power sector, especially the Independent Power Producers (IPPs). But we also see quite a bit of opportunities in the FMCG space, so investments into manufacturing plants. There are clients setting up plants to be able to manufacture their products locally, which is good for the market. So, we are seeing opportunities in that and the funds we are raising would go towards supporting our corporate clients who are going into either expanding their current facilities, building new plants and also working capital for their businesses.

I think local production is a sustainable business. Importation of products is not a sustainable business model, given what we have seen with foreign exchange shortages. So what we see in the market today are businesses looking to explore what can be produced locally. It is not without challenges in the sense that we have limited infrastructure capability we are having in the country. Inefficient roads, rail networks, power, generally makes the cost of production higher than other markets, in a global context.

But we believe that as investments are made into rail, things would get better. So, I think clients need to take a long-term view and that is what I encourage them to do. And the clients who are taking long-term view; we are convinced it is the right thing to do, set up plants locally and produce locally. There are going to be some equipment that naturally we don’t do here that would be needed, but then you limit your foreign exchange needs to those ones.

With your foray into the power sector, are you seeing and headway?

Power projects naturally take some time, maybe about three and half years. So, we are confident that by that time, a solution would have been found to the power situation in the country. Of note however, is that the power purchase agreements that were negotiated for these new projects are much better than what pertains before. But I think sometimes we generalise issues in the power sector. So, in talking about the power sector, it is important we identify the three key areas –generation, distribution and transmission. We do believe that a lot of the issues that were in generation came from gas supply shortages which were obviously related to the Niger Delta challenges. That has now been resolved to and there is good gas flow, so we should see generation pick up.

Then the issue now becomes transmission. We do believe that the capacity of transmission would go up to maybe 8,000 megawatts. We are not there yet and the power plants that we are supporting would still not hit that target yet. But we are aware that the government is working with the Transmission Company of Nigeria (TCN) to enhance its transmission infrastructure. There are lots of issues in the distribution sector. That is reflected in the type of tariff that they are able to charge. Also, with the sale of the assets from Power Holding Company of Nigeria (PHCN) to the new buyers, the template captures the cost of acquisition or the cost of funding, that they take their own technical capabilities. So, those templates need to be reviewed to ensure that we find a good way as to how the tariffs are better reflected.

I think until that is done, we are still going to be having the liquidity challenges we are having in the distribution sector. Now, if the distribution sector is not working efficiently, the generation sector does not generate the required revenue and that becomes a vicious cycle that needs to be broken. We are aware that the Ministry of Power is engaging them to try and find solution to the issues. The Discos have a role to play in terms of enhancing their technical capabilities and efficiency while we look for solution to the liquidity shortages that besieged that sector. So, we are encouraged that in the generation side where we currently focused, that there is room for more power producers.

We have seen near convergence in foreign exchange rates and a lot of people seem to be excited with activities on the Investors and Exporters’ (I&E) window, what is your take about that?
Look I think certainly the efforts of the Central Bank of Nigeria have brought us to where we are. The creation of the NAFEX which is also known as I&E window is certainly a welcome development. Normally the central bank would always have its policies, but a market is a market and willing sellers and willing buyers should be able to freely exchange what they want to sell or buy and that is what the central bank has done. So, I think as a market, market participants should determine the price and I am encouraged that, that is what I & E market is doing.

I am very excited by the central bank approving that market and today we do quite a bit in that market and international investors and local investors who have dollars to sell go to that market. And when they are selling it, local corporates and investors who have a need for it are able to freely buy it. What it does is that it has brought confidence, certainty in the market, which in itself is fuelling demand and supply. As market participants, we must always play by the rules set out by the central bank so that the market can flourish.