Managing Director of Fidelity Bank Plc, Nnamdi Okonkwo, in this interview with Arise News Channel anchor, Modele Sharafa-Yusuf, speaks on the economy, interest rates, development of MSMEs in Nigeria and financial technology
Nigerian banks have been through some challenging times in recent years and we have seen margins come under pressure. How can banks continue to achieve growth amidst the pressure and the challenges?
Pressures and margins are shrinking. That is the reality. What that means is that banks have to challenge themselves to strengthen risk management. You must have a robust risk management framework, you have to strengthen governance, and you have to get innovative because as funded incomes are under pressure, you begin to think about what you can do with technology and innovation. You begin toÂ think about what you can do in terms of process efficiency, optimising, doing more with less. If you take simple things that happen in the banks these days, there were times when tellers were a major component of the workforce. Now if you get the technology platforms working very well, youâ€™d probably move such tellers to other functions. Innovation is the key word. You have to be forward-looking and you also have to realise that there are threats to our income and these threats are real.
Right now, banks have to adapt to regulators, customer and technology changes. Which has been the most compelling and why?
It is very difficult to say which one of them is the most compelling. You know even with advances in technology, the regulatory framework has to change. As the operators are learning, the regulators are learning as well. Banking supervision and examination, the colour of risk has changed significantly from what it was 20 years ago. Itâ€™s difficult to say which one is even more. But if I take them one by one, today, you need the regulators to be on their feet just as you need us, the operators, to be on our feet because the risk in the environment is so diverse and it is not what it used to be in those days. Reputational risks and all sorts of risk have been heightened. You then understand why operators need to be more up and doing.
Just expect regulators all the time. What that means for us is that you must get your compliance very well aligned into what we are expected to do. You must keep your risk management framework very strong and you have to be aware of changing possibilities so that you are also ready for the regulator. At the end of the day, the industry is better for it.
When it comes to customers, the demographics have changed significantly. In those days, if you are not happy with your bank, most likely you will write a letter complaining and then somebody minutes it to another, who minutes it to the next person and customer service was not as crisp as it is today. The millennials today do not have time to write letters. They know there is Consumer Protection Unit at the Central Bank; they know there is Consumer Protection Council, they know their rights and they practically live on the internet. At the push of buttons, the reputation could be damaged. So, we have to stay alive and awake to changing customer needs. We are very much aware of those things.
When you talk about technology, the banks will not always be needed.Â I was reading something from Brett King and he said in 2025, the Worldâ€™s biggest banks will be fintech companies. Research has been done in that direction and banks are aware of these threats and this is putting pressure on us. So what do we do? We are aligning and even collaborating with some of these fintech companies upfront so they can realise that somebody is about to â€˜eat your lunch.â€™
Some people will say that extreme risk taking in the industry has been tempered. What is most responsible for this? Is it compliance? Cost or fear?
All I can say is that the complexity of risk has increased. Banks are more aware of the changing risk environment. Way back, you could see a situation where, for instance, a single person could approve x amount of loans, now there are checks and balances, stronger than ever because at the end of the day, the depositors own the bank. If you have N1trillion balance sheet, you may find out that only 20per cent or less of those funds are shareholdersâ€™ funds. Substance over form, depositors own the bank. It means that we have the responsibility to protect the depositors.
So, when banks shy away from certain risks, it is because they are thinking a lot about the depositors. I will give you an example. In certain operating environment where you have short-term funds, that is not when you will finance a 15-year-old project with two-year moratorium. The balance sheet doesnâ€™t have that kind of fund. Then the uninformed person will say banks are not taking risks. I think Iâ€™ll like to summarise it by saying banks are beginning to take more of measured risks or calculated risks.
E-commerce is expected to be one of the biggest competitors for retail banks in the next five years. How is growth of e-commerce impacting your bottom-lines already?
Like I said earlier, by e-commerce, basically, we are talking about fintech companies. Banks are alive to those threats. We at Fidelity bank now have our own sponsored e-commerce site where SME customers display their wares and we are actually adding value to the SMEs. Rather than fret over such threats, you collaborate to compete. We are aware that if you donâ€™t do something about that you will lose. We have our e-commerce site called the Green Mall and that is one of the ways that we addressing the issues.
You think the continuous retention of the tight monetary policy of CBN is justifiable?
Letâ€™s not forget the origin of the monetary policy tightening. The CBN has the responsibility to manage stable exchange rates and ensure monetary stability. So, it was inflationary trend that made CBN to tighten its policies. Basically, if you look at what has happened, inflation at the beginning of the 2017 was 18.72 per cent by end of October, it was 15.91 per cent. It means they are beginning to cage inflation. If we look at the exchange rate where we were last year and where we are now, especially with the introduction of I & E window, clearing the retail market and we have the SME effect intervention. We are now seeing near convergence of rates and the multitude of rates are now shrunk to a fewer number. You can say that monetary tightening has shown some positive results. Given this situation, the temptation is to adjust the MPR. When you do that, you lower the cost of borrowing. Thatâ€™s fine, but then you will stimulate demand and growth, and what you are going to get might just be spike in consumer index and then you are back to square one.
In my opinion, it is good not to adjust just because you are seeing signs of improvement. I think the economic fundamentals have to stabilise before you let go. It is debatable, but given the results we have seen so far, may be sometime middle of next year or so, but for now, it looks like itâ€™s working and donâ€™t expect that the MPC will let go the rates.
Why fix when itâ€™s not broken?
Many things are broken and many things have been fixed (smiling)
CBN is also considering lowering its CRR for SME-friendly banks. What does it mean for a bank like yours?
If you talk about SME-friendly banks in Nigeria, anyhow you measure it, Fidelity will likely come first or second, depending on what you are measuring. In the last four years, there is no single year that Fidelity has not won one or two awards on SME support. It is a welcome development, it will affect us positively because we approach SME banking differently. We approach it from capacity building, access to market and that is why we have the managed SME unit, which handles entrepreneurs and gives them the necessary advisory to give them their businesses. So, any development like that will be welcome because our SMEs will be happier for it.
The CBN governor also said the apex bank was working on the strategy aimed at sensitising the banks to support MSMEs. What would you recommend that they include?
As it is now, there was this talk about releasing some of our CRR funds, if you are going to support SMEs, for us it is a welcome suggestion. Beyond that, we need to see improved infrastructure for these SMEs. We need to address the bigger issues so that their cost of doing business can come down. We need to see regulatory framework that encourages businesses. For instance, if you come out with a policy that says whatever amount you are lending to SMEs, there will be a matching grant, just like we have had with the Agric funds, it will help.
No company has been able to access the N26billion SMIEIS fund since it was set up. What have you found to be the problem?
We discussed this recently and extensively. It is true that the execution of that plan has not gone as expected. As you are aware, CBN is taking it seriously and I believe thatÂ recently after the Bankersâ€™ Committee Retreat, you would have seen that a framework has been worked out to make sure that these funds begin to get utilised. From now on, we should see some results. When you introduce something new (remember 5 per cent of PBT was deducted to fund that fund), sometimes you need framework and you need to get it right in order that it doesnâ€™t go the way of some other funds in the past in terms of utilisation. But I believe what CBN has done- they are near ready.
Regulation is clearly desirable. But how can authorities place the system without retarding economic growth?
Any system without regulation and control is like building anarchy. Collaborative regulation, education and so on help. For instance, if you make rules for banks, and they understand why it is done and what is expected of them that will make more sense. Like we have seen in the crisis of 2016 when a lot was going wrong in the economy, we were not just waiting for Bankersâ€™ Committee meetings before we met with the Governor. Several times, we would either meet in Lagos or Abuja. At some point, meetings were weekly to discuss developmentÂ the FX market. I think the CBN needs to be commended because I remember one of the most effective meetings we had where we were wondering why SMEs were not importing. They gathered all of us to come up with ideas and after that meeting they came up with the $20,000 allocated to each SME. Suddenly, that market was cleared.
We had the black market redefining our exchange rates as a country. The question is, what percentage of our FX comes from this market? Very small. Things like school fees, medicals make people go to the black market because they canâ€™t get official rates. CBN started allocating specific funds for those retail needs, the blackÂ market rates and the official rates began to come closer. I will describe that as collaborative regulation. Before, CBN was not frequently meeting with bank CEOs to say, from what you have seen with customers, what do you think we can do? And they just slammed us with rules. The rules might be like treating the right ailment with the wrong medicine; so I believe what I called collaborative regulation actually helped.
Compared to South Africa with loans to GDP ratio of about 90%, financial intermediation today in theÂ Nigerian economy is still constrict. Is there still a hangover from the 2009 crisis?Â
When we compare economies that are not exactly alike, it is difficult. When people talk about slow growth in loan, the question I always ask is: was a bank not wset up to take up deposits and give loans? When we do that, we make money. So why would we shy away from creating loans? People should remember that there are bigger issues. For instance, today, we donâ€™t have a national ID scheme. If you are Modele and I am Nnamdi, there are many of us with that name but none of us has that unique number. If I am going to create loans, it means I have to look for second way out. How do I get my money should you not be able to pay? Banks do not lend money to companies so that theyâ€™d sell their assets to recover their money. We lend money so that you can use it and return it to us. But in a situation where it was only recently that we began to have a referencing system where it became easier. Like the CRMS, if I check today and I found out that you are a bad debtor in another bank, I am not allowed to lend money to you. We didnâ€™t have all that framework in the past but imagine a situation in some countries where whatever you do is instantly recording some minus or plus for you in terms of credit rating, nobody wants to spoil his credit rating.
But in Nigeria, because of our low infrastructural development, you could have recalcitrant borrowers go from one bank to another. As you know, we are getting there slowly. Very soon, with the BVN, a bank can actually block you from borrowing. That is, when we develop up till that level. But today, with the BVN and the CRMS, you will agree with me that it is easier to create loans. Having said that, we still have huge amount of borrowers, who do not have alternative means to secure their loans in banks. And banks are also concerned about lending monies that donâ€™t come back and you have nothing to fall back on. So, this narrative is what is affecting loan growth.
People say part of the problem is that, we have too many big banks like yours. That most banks tend to look at large corporations and invest in government securities and they really donâ€™t have time for SMEs, where the real economic growth happens and jobs are created. Your bank took a different path and is very focused on the economy. What are the challenges of bridging this space?
In the SMEs space, you are basically taking higher risks. On one of the occasions when we won SMEs bank of the year, and I was going on the podium to receive the prize, I had some other colleagues and CEOs who said to me: Now you are receiving prize for best SMEs bank, in three years, you will be the best bad loan bank. Fortunately, that has not happened, and we will continue to support SMEs because our strategy is deliberate. We have what we call managed SMEs and the general categories of SMEs. We serve these people in clusters. People who have homogenous needs, we developed products for them.Â
And the prequalification is done in such a manner that some of them are mutually reinforcing. Once one person defaults, it can shut down the product line for the rest. So they make sure that they pay. There are many ways you can handle SMEs and that is why Fidelity has largely been successful. We have done it back to back and our NPLs in that area is not anything worrisome.
How is quarter four looking? Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â
For Q4, when we had our investorsâ€™ conference call, we had guided a market that we do not see much changing and truly, this is the last month of the quarter. We are looking set to hit our projections that we had guided the market for. Those who participated in our conference calls, we gave them certain guides as to what we would likely deliver. I dare say we are on course to deliver what we have promised.
What are your projections for retail lending in 2018?
You know in the last one or two years, salary payments were delayed, disposable income was lower, so retail lending was such a high-risk game. With the gradual recovery in the economy, we see retail lending picking up and somewhere between 7.5 per cent to 10 per cent growth in 2018 will be more likely. We had some huge retail customers in clusters- either staff of major companies or public sector- depending on how badly hit each sector is, will determine how much percentage you want to grow in that area.