As the global economy gradually recovers from the disruption caused by the covid 19 pandemic, President of the Association of Asset Custodians of Nigeria (AACN), Mr. Abiodun Adebimpe, the umbrella body for Nigerian custodian banks, in an exclusive interview with Eromosele Abiodun, explains how the industry was able to weather storm, the e-Naira, and licensing of payment service banks. Excerpts!
For almost two years, the covid 19 pandemic ravaged the world and nearly brought the global economy to its knees. Like most sectors of the economy, portfolio investment was naturally impacted with consequential huge declines in assets under custody (AUC). How would you assess the industry’s performance, both globally and in Nigeria?
Yes, our industry was and is still not insulated from global or local macroeconomic shocks. Remember that we are part of the capital market ecosystem and anything that affects the market will inevitably impact our industry. The big difference is that the custody industry may take the hit much faster and deeper given the dynamics of our business. I don’t have the exact figures offhand, but from our guesstimate, total non pension AUC took a significant hit at the height of the pandemic. We are hopeful that things moderate soon.
Now the global economy is on the recovery path and we believe it will be sustainable considering the numerous measures being implemented by governments across the globe to tackle the pandemic once and for all. Stability is returning to the markets and cautious optimism is on the rise. A major expectation associated with a thriving economy is that people will have the confidence to make far-reaching economic decisions.
Both at the national and global levels, we are beginning to see an uptick in the patronage of custodial services, and it is a trend we believe will continue.
Let us not lose sight of the fact that even during the height of the covid-19-induced turbulence, the financial markets remained open and functioning, which helped maintain relative level of stability and bolster confidence in the economy. This was possible largely because of the regulatory reform measures that strengthened the banks in particular, as well as internal mechanisms taken by the industry to remain competitive and strong footed.
Have you identified any new normal in your industry in the ‘aftermath’ of the pandemic?
The outbreak of the pandemic undoubtedly triggered unprecedented volatility that heightened operational and business risks for global and sub-custodians and their operating models. Business continuity plans had to be activated so quickly with the attendant need to tweak some of the plans. Nobody had anticipated the widespread social distancing requirements and remote working that suddenly became the new normal.
As an industry we were left with little or no option other than to rise to the challenge by adopting various approaches to ensure that assets under custody remain safeguarded and our operations continue unhindered. It was to meet this imperative that agility, innovations, ingenuity, collaboration and technological adoptions became critical drivers. The response levels however differed from one organization to another.
To offer a straight answer to your question, I would say that despite finding ourselves in an unprecedented circumstance, the industry responded robustly by deploying all manner of tools to ensure that we continue to deliver to our clients and other key stakeholders. In addition, the pandemic compelled the industry to rethink more broadly about systemic risks, unlike the past where risks were being treated as business or geography specific.
I must emphasize that with the invasion of the pandemic, the imperative and benefits of digitisation rapidly switched from hypothetical and nice-to-have, to practical and indispensable. In fact, it has come with its own blessings in terms of faster adoption of technology and some cost reductions.
It is expected that lessons learned from the disruption caused by the COVID-19 would be embedded in operating models of banks moving forward.
To someone who feels apprehensive about the recovery of the industry from the pandemic, what would you say?
From my personal reading and numerous expert opinions, the threat posed by the pandemic is steadily receding; mortality rates have declined considerably and the vaccine rollout continues apace globally.
The cautious lifting of lockdowns, save for the new omicron variant which is pushing some countries to reintroduce selective restrictions, has opened the space for improved connections with clients and major stakeholders.
Let us also note that the global economy is recovering and growth projections by such organizations as the International Monetary Fund (IMF)/World Bank present optimistic scenarios in 2022. The world’s two largest economies, the United States and China, have effectively fully recovered. This two superpowers shape the direction and health of the global economy.
The global custody services market is experiencing strong growth presently. However, we should also note that there are risks and opportunities in every crisis. Policymakers and market participants have voiced confidence about sustainable recovery. So, we have to put the past behind us and push for a better future.
The Central Bank recently launched Nigeria’s Central Bank Digital Currency – the eNaira, coming on the back of growing adoption of cryptocurrencies and digital currencies around the world. Can you situate these developments in the context of its impact on custody services in Nigeria?
We must first admit that money and its accompanying institutional foundations have evolved in line with human development. So, the launch of cryptocurrencies and Central Bank Digital Currencies (CBDCs) is in conformity with this trend, with digital innovation as the bedrock. They have obviously gained increased prominence in recent times.
It will be safe to say that CBDCs represent one of the significant innovations in the evolution of money worldwide, as economic management deepens. According to one account, CBDCs are a form of digital money, denominated in the national unit of account, which is a direct liability of the central bank.
So, CBDCs have evolved as part of the greater digitalization of money. The usage of CBDCs depends on the objective being pursued by a country’s central bank.
Though the IMF reportedly opined that the eNaira may reduce demand for deposits in commercial banks, it is important to note that the eNaira would increase financial inclusion, enhance remittances and reduce informality. This means that there are risks and benefits tied to the policy. A clearer picture will emerge in the days ahead.
It will be safe to say that whatever decision impacts on the financial services industry and the capital markets in particular will definitely affect custody services. Issues around cyber security and operational risks, for instance, are inevitable.
For a developing and poor country, a lot of people in Nigeria will see custodianship as a service for the rich. How true is this assertion and what is AACN doing to change this narrative?
This is an issue that we have advocated on in the past and will continue to address considering that the overall understanding of the concept of custodianship of securities or what some other institutions refer to as securities/investor services remains low in various segments of the society. But to the extent that virtually everyone can acquire assets – in whatever form – then it is a market for everyone, especially corporate organizations. You don’t need to be a billionaire to buy shares in a company, for instance.
Overall, custodianship refers to the whole gamut of activities that take place after a financial security trade has been concluded. This is commonly referred to as post-trading activities.
Enlightenment and advocacy underpin the activities of AACN since the group was established 12 years ago. We undertake various forms of awareness campaigns in-country and abroad, with our flagship event being the annual investors’ conference. We remain unrelenting in pursuing this cause.
With continuing emphasis on financial literacy by all stakeholders, I believe that the knowledge of custody services will improve and with that would be market expansion.
Can you tell us the distinction between a custodian and a broker?
In simple terms, the custodian refers to the entity responsible for the clearing, settlement and safekeeping of a client’s assets, while a broker provides trade execution services. In essence, a broker is primarily focused on accessing the financial markets on behalf of the client, while the custodian takes over the subsequent post-trading responsibilities on behalf of a portfolio investor, whether the securities are in physical or electronic form.
In securities market parlance, a custodian is legal entity, usually banks, appointed to hold and protect another entity’s funds or investments through either direct or indirect means. The primary goal of a custodian services is to lessen the risk of the theft or loss of clients’ assets as well as take over the post trading activities from the investor.
In addition to holding securities for safekeeping, most custodians also offer other services, such as account administration, transaction settlements, collection of dividends, interest payments and maturity proceeds, proxy voting services, tax support, and foreign exchange.
Also note that the fees charged by custodians vary, depending on the services that the client desires. Most custodians in Nigeria charge annual custody fees that are based on the aggregate value of a client’s portfolio investments in their custody generally referred to as Assets Under Custody (AUC) and transaction fees. Custody fees are typically payable monthly
In the event of collapse of a custody bank, what happens to the assets of a client?
A major component of a custodian’s risk management measures is the use of nominees as separate legal entities. The essence of this is the prevention of a custody client’s assets from being taken over by creditors in the event of an insolvency or collapse of the custodian bank.
Remember that assets held under custody are rarely physical, meaning that if a custodian bank goes under, the asset ownership records and valid custody agreements are consequently verified independently at the central securities depository (CSD). The CSD is a key market infrastructure that provides the repository of all investors’ positions.
With the pace of technology and innovation, clients are constantly monitoring the health of banks with cybersecurity, capital base and reputation as key sentinels.
The CSDs have clear operational guidelines for the recovery of custodian clients’ assets in the event of a custodian’s insolvency. The AACN is working actively with the regulators to ensure that our regulatory frameworks contain detailed guidelines to complement the existing operational procedures.
What case do you normally make when persuading a potential client to entrust the custodian with the safekeeping and reporting of his financial assets?
Since the assets and securities of a client may be worth hundreds of millions or even billions of dollars, it is only logical that the safety of such assets is put in the hands of large and reputable firms.
So, in placing your assets with a custodian, you must look out for institutions with strict adherence to the highest quality and ethical standards, robust financial base, a culture of excellence and professionalism and customer-first mindset.
Technology, automation and digitization have become pivotal in modern day management and business. To what extent has the Nigerian custody industry imbibed these in your operations?
We operate in a global village where virtually everything is shared. By its nature custodianship traverses boundaries and jurisdictions. To function in such a setting requires best-in-class technological platforms to provide efficient services to clients.
The ways and manners in which securities are traded, settled, cleared and safe-kept have evolved with time.
Most securities transactions are now done electronically. Therefore, custodians leverage off best-in-class technological platforms in rendering our services. Long gone are the days when things were run off spreadsheets.
We use core platforms which can be integrated with other market and client platforms/infrastructures. Aside SWIFT, which is a member-owned cooperative that provides safe and secure financial transactions for its members, custodians now integrate with key market infrastructures like CSDs through APIs. We also use front-end client interface platforms to put a substantial part of our system capabilities in the hands of our clients. Just to mention a few.
How would you describe regulatory regimes in your industry? Are there areas requiring further strengthening or redirection?
We are guided by the same rules that apply to the banking and capital markets. We don’t have a situation of perfect regulation anywhere in the world. Regulation responds to the dynamics of the market and economy, as well as the national interest of the country concerned.
In Nigeria, I think our regulators are doing their best. What may be required is to strengthen the capacity to respond promptly to developments in the economy. Specifically, both the SEC and CBN have been quite proactive in coming up with regulations and collaborating with market operators to ensure that our market remains well regulated and investor confidence continues to rise.
A situation where there is inconsistency in regulation, investor trust disappears and with that comes adverse consequences for the market and economy. So, moving forward, we hope to see more regulatory focus on policies that improve investor confidence in the capital markets, and less on market instruments and its infrastructure.
During your inauguration as AACN president in December 2020, you pledged to sustain and improve on the milestones recorded by your predecessor. One year later, how do you describe the journey?
We have remained steadfast in pursuit of both the mission of the association as well as my personal goals as the president. As you are aware, we held our flagship annual investors conference earlier this year virtually. The event, which held between 15th and 16th of June 2021, was a huge success in terms of participation, the caliber of participants and quality of discourse.
The theme of the conference was “Nigerian Capital Market: The Road To New Normal”, which had the overarching objective of attracting institutional investors worldwide, issuers, regulators, custodians, broker dealers, fund/asset managers and registrars. We also deliberated on issues such as investor confidence, processes, infrastructure, products, governance, regulations and market developments.
In other areas, our association is represented on all sub-committees of the Capital Market Committee (CMC) of the Securities and Exchange Commission (SEC).
In addition, AACN has been a key part of past and ongoing market reform initiatives, including collaboration with the Central Bank of Nigeria (CBN) to facilitate a more efficient and investor-friendly Certificate of Capital Importation (CCI) process; collaboration with the SEC to initiate the mandatory appointment of Custodians to registered Collective Investment Schemes as well as discretionary funds; development of CBN guidelines for the custody of money market investments, full adoption of ISINs (International Securities Identification Numbers) for all Treasury bills, among others.
These are just a few of interconnected activities and initiatives that AACN has been actively participating.
Our tradition of teamwork is something that will continue to be upheld during my tenure.
As you mentioned earlier, your flagship event, the annual Nigeria Investors’ Conference, attracted an array of prominent players in the economy in 2021, although it held virtually. What modifications are we likely going to see during the next edition in 2022? For instance, is it returning physically to London or would remain virtual?
We are still working on the modalities for the next edition. Its shape and theme will depend on our assessment of the contemporary situation as well as lessons learned from previous editions. Do not forget that this is a forum designed to present the potentials of the Nigerian economy to the rest of the world. So, whatever modalities or approaches we adopt will be in conformity with the aforementioned goal. Thankfully, the first virtual edition we held in 2021 was quite successful This means that whether in person or virtually, the next edition promises to be another event to look forward to by all and sundry.
We are still in the planning stages, and at the appropriate time will make public our plans for 2022.
AACN has been in existence for 12 years as the umbrella body for Nigerian custodian banks; have you considered membership of the Association of Global Custodians or the International Securities Services Association (ISSA) and other collaborations as a way of expanding your reach and relevance?
Well, being part of a global body for mutual benefit is a natural course of action. What I can confirm to you is that AACN collaborates with similar trade groups across the world. For instance, we have been working very closely with the AGC (Association of Global Custodians) on a number of initiatives aimed at further improving overall investor experience in our market. We are already a part of a global system even if the Nigerian custody industry is still in the embryonic stage. And as our clientele are largely global entities or institutions, we have to conform to global best practices.
The CBN has granted approval in principle to two telecommunications companies in the country to operate payment service banks. How did core bankers receive the news, and how would this development affect conventional banks?
The issue of PSBs (payment service banks) has been in the works for some time. So, the banks weren’t particularly taken by surprise.
A major objective of the CBN for licensing payment service banks is to enhance financial inclusion in the country which is a welcome development. I think this development will bolster this goal.
The banking industry is not static. It continues to evolve just like other sectors of the economy. In essence, the sector will continue to adapt to developments in the macro economy.
Something that should be made clear is that the PSBs would be structured in a way that they will be subordinate to the commercial banks in the sense that the funds they generate would still be domiciled in the banks.
Also, the development is expected to increase competition in the industry, and by its nature competition enhances efficiency and quality service delivery. As everyone strives to offer the best, the customer emerges the ultimate winner as he has lots of options to choose from and at lower costs.
There is no doubt that the banks would lose some of their traditional banking revenue but they would respond in different ways to cover the shortfall. This may just be by creating more loans and extending such to more segments of the economy. You should note that the PSB license does not give the telcos the power to grant loans directly. They are also barred from lending and receiving deposits in foreign currency. The telcos may focus on rural areas and this will save the banks from the costs and logistics associated with opening operations or branches in remote areas.
I also expect to see greater collaboration between the banks and telcos in offering loans to retail consumers.
It is still early days to make definitive comments on the licensing of PSBs, but like I mentioned earlier, the fintech space is one that banks have been making considerable investments and they would continue to deepen their presence there.