Category: CEO

The licensing of cash-in-transit and cash processing companies by the Central Bank of Nigeria (CBN) is a good initiative aimed at taking off some burden from commercial banks, but the initiative may be jeopardised if the apex bank fails to enforce the rules governing the sector. In this interview, the Executive Chairman, XL Africa Group, promoters of Integrated Cash Management Services Ltd (ICMS), one of the licensed cash processing firms, Charles Nwodo Jnr, says their business is being cannibalised by those it is meant to serve, reports Group Business Editor SIMEON EBULU.

Where does ICMS feature in the cash value chain?

Cash industry in Nigeria is relatively new and therefore ust evolving. The Central Bank Nigeria (CBN) deserves credit for this development, which aligns Nigeria with global best practice in currency operations.What we call the cash industry was part of what used to be called Branch and Currency Operations until it was excised and made a full Department of Currency Operations as part of the strategic and continuous efforts of the CBN to modernise the Nigeria Financial Industry.

Before ICMS and other industry operators were licenced, the CBN was the main operator and in that situation was subsidising the banking industry by providing most of the currency distribution and processing for banks at highly reduced costs.

By licensing new operators in the cash value chain, the CBN was adapting the Nigerian cash industry to global best practices because in other parts of the world, the distribution, processing, securing and even packing of cash is done by private entities. So, to enable the CBN deploy resources and focus regulatory attention on these important roles was the main reason that ICMS and other operators were licenced to provide those services.

By licensing ICMS and the other operators, the CBN has a responsibility to engender a conducive operating environment for the licencees to avoid the past trends where operators in this sector folded up due to poor operating environment and hostile regulatory disposition.

The cash industry value chain is made up of retailers that generate a lot of cash, such as petrol stations, markets, gambling  casinos, churches and mosques supermarkets.  And, of course, you have the CIT companies and cash processing companies, banks and then the CBN.

 What are the issues?

Today, part of the challenge we face is persuading the CBN to enforce its guidelines. What that has done is that it has created a situation where certain practices that are against official policies and guidelines and even our country’s laws are continuing unchecked. Some of these practices are the spraying of money at events, as well as hawking of new naira notes openly. I can tell you authoritatively that the volume of cash in circulation worldwide and in Nigeria is not decreasing as many people seem to believe. The reason the CBN initiated the cashless policy was not necessarily so that overnight all the cash in circulation would disappear. The cashless policy was necessary because the volume of cash in circulation and the attraction for cash transactions was growing at an alarming rate and threatening national security in some ways.

What do you mean by cash is going nowhere?

We belong to an international association which sponsors research into various segments of the payments space, including cash in circulation in various countries and across the world. In the last few years, statistics has shown that in the European Common Market area and Asia, particularly the cash in circulation, has been growing steadily and in places like Africa the growth is even more, on a year-to-year basis. And this is in spite of the rise in digital and card payments. So, people were surprised because simultaneous to this, e-payment was rising, cheque payment was declining and internet payment was also rising.  One explanation for the continuous popularity of cash as a medium of exchange and value storage, is that there is a correlation between crisis/tension and rise in cash volumes. People tend to seek to hold cash in times of uncertainty and crisis and as the world continues to witness one crisis after another in different continents, it is no wonder that the volume of cash in circulation has continued to rise. Most central banks across the world know this and understand the trend very well. So till tomorrow, cash is still the greatest store of value. If gold was available to carry safely  in small pieces, maybe it would be competing with cash.

Now with the COVID-19 pandemic one expects this trend to endure into the long term. Statistically, if you look at the CBN reports on cash in circulation, it remains high though the CBN has in recent years taken laudable steps to control the rise. That is because at the end of every transaction chain, whether it is e-payment or  Point of Sale (PoS), there is cash at the end of it. So, the frequency of cash payment may reduce, but the ultimate value of cash remains a constant and this is one of the issues that engages the expert attention of central banks around the world. Even in the United States with all the advances in e-payment and card transactions, significant cash transaction volumes exist. In fact, the second largest cash processing company in the world is based in the USA and has several hundreds of CIT vehicles and cash sorting centres in the USA and Canada. That is America that is easily identified as an almost cashless society.

What are you advocating for the CBN to do?

The central element of our value proposition is the inherent principle in shared services. This means that if I use the same resources or platform to service multiple clients efficiently, each of the clients spends less and I grow in scale and improve in efficiency continuously. This model is simple and trusted and validated by the success of several companies and industries in many parts of the world.

Some banks still operate in violation of the CBN guidelines that allow you to handle cash distribution and processing. What is the level of compliance in the industry?

We have more banks in violation of this CBN policy. We are probably servicing about 30 per cent of the available market share. I sympathise with the CBN on this because the capacity constraint  exists among licenced CIT and cash processing companies like ours. And the CBN has a responsibility to maintain an orderly and safe financial system. So, the challenge is for us to ramp up capacity quickly to strengthen the regulator’s hands to enforce compliance with the extant policies and guidelines without endangering the stability of the banking system. The truth is that because the banking industry in Nigeria is highly profitable, a lot of banks don’t care about cost optimisation.

Why aren’t the banks conscious of your cost saving service?

There are several easy ways that banks make money in Nigeria. But hopefully, with the COVID-19 pandemic and its consequences which  will inevitably impact the revenue profile of banks, I am sure many of them are going to start rethinking their mode of operation. Many of them invest too much in cash management infrastructure – they have tellers, managers, security men, cash sorting machines, huge vaults, bullion vans, escort vehicles, etc and a lot of others. But, that is not the business of a bank. A bank’s business is simply to do banking … collect deposits, lend money, make profit from doing these. So, the banks by continuing to distribute and process cash for themselves are effectively cannibalising the business of licenced CIT and cash processing operators.

So, what do you want the regulator to do?

To be honest, what the regulator should do is similar to what they do for banks.You know that whenever a ‘Wonder Bank’  or unlicenced finance house starts to operate, the CBN always issues warnings to  members of the public against them and at times, the CBN even works directly with the Nigeria Police and other security agencies to forcefully shut down such premises and arrest the illegal operators. The CBN doesn’t allow the ‘Wonder Bank’ to operate because they have licensed commercial, merchant, mortgage and community banks. So, if the CBN has licensed us as CIT and cash processing companies to operate in the cash management value chain, the same CBN  should protect our business  by forcefully and aggressively enforcing the guidelines. With that, the banks would be forced to work with us and there are several non disruptive options of working with the banks to achieve the goal envisaged by the CBN in enabling the creation of the cash operations sub sector.

The problem is that the banks have infrastructure and operations that they are not licensed to undertake. And the licenced CIT and cash operations companies do not have the infrastructure to service the market as desired by the CBN. So, the CBN  ought to mediate the situation by encouraging the banks to surrender the huge CIT and cash processing infrastructure at their disposal in obedience to the dictates of extant policies and guidelines and also in realisation of the need to focus on their core business and reduce the substantial operational expense that goes into the CIT and cash processing infrastructure . This is a very simple and uncomplicated issue in my opinion.

When we started this business in 2008, we had a South African Technical Partner called SBV Services. SBV Services is owned by the four biggest banks in South Africa. It was set up in the late 80s or  90s, essentially because the South African economy was at this stage we are then. It was set up in South Africa to provide a shared services platform. So, our prescription is not rocket science. We operated with SBV Services as joint venture partners until two years ago when we bought over their shares and they left Nigeria. So, global best practice is that central banks don’t get involved with the distribution and processing of cash. Central banks only get involved in the issuance of currency and  destruction of unfit notes.

Others things like distribution and processing are handled by entities like us.  Another point is that a  bank branch is not supposed to be constructed like a fortress, which is the challenge banks have. That is why it is very expensive to set up bank branches in Nigeria; because if you set up a bank branch, you have to deploy resources to provide several non core CIT and cash operations infrastructure and personnel which are non core to the business of the bank and all these costs are passed on to the customers.

What is the medium to long-term vision of ICMS?

Our plan is to support the industry growth aspiration of the CBN by solving  the problem of cash distribution and cash processing capacity constraint so that ICMS and other licenced operators in the sector can benefit from a more aggressive enforcement of extant policies and guidelines by the CBN. To this end, we plan to have nine additional cash processing centres across Nigeria in the next  18 months and expand our CIT fleet of armoured vehicles  substantially. Our ultimate goal is to be listed on the Nigerian Stock Exchange in the medium to long term and we are working hard and actively on these plans at this time.  We understand the business, we are the only licensed operator that attracted a foreign joint venture partner in this sub sector and the partnership with the foreign company earned us the undisputed knowledge leaders in the Nigeria market and we still have that technical partnership. We see what they are doing in South Africa and the kind of value they are adding to the financial ecosystem in South Africa. That is what we aspire to replicate in Nigeria. That is what is driving our expansion plan.

What are the challenges?

We have had some poor records in Nigeria. Nigerian banks had set up institutions that didn’t succeed. You probably have heard about a collaboration between Nigerian banks that resulted in a company called the Pioneer Sorting Company Limited. It was set up in the 80s and 90s by some banks. They floated it then under the guidance of the CBN, but it failed. They also set up another one called ATM Consortium.The purpose of the ATM Consortium was to create a shared platform to process industry wide ATM fit notes and perhaps even manage the roll out and maintenance of ATMs on behalf of Nigerian banks. This, again,  failed. So, there is a recognition that a shared services platform is the typically the right model for most industries. Typically, currency operations constitutes between 25 and 40 per cent of the cost of operations for most banks depending upon the efficiency levels and geographic dispersion.

Managing Director, Mainstreet Microfinance Bank Limited, Adegoke Adegbami, is in charge of one of Nigeria’s leading microfinance banks. In this interview with Deputy Group Business Editor, Taofik Salako, Adegbami speaks on the imperatives, challenges and prospects of microfinance banks within the context of the macro economy.

FROM the standpoint of an operator and a financier, are microfinance banks really playing the distinctive roles of enablers, especially within the micro, small and medium enterprises segment? 

Microfinance is supposed to drive the growth of small and medium enterprises (SMEs), but that is just one side of the story. If somebody is going to drive the growth of SMEs the person needs resources, and the resources must come from somewhere. The question now is where is the resources supposed to come from? I think the fundamental problem we have here is that as a civilised society, we have not really defined what the role of microfinance banks (MFBs) should be and what they need to be able to play that role.

The point is this, if microfinance banks are not playing their roles, it’s not only the problem of operators. Everywhere the microfinance institutions are playing the role very well, the government has not left the microfinance as orphans to go and fend for themselves. What is supposed to happen is that microfinance entrepreneurs, people who own microfinance institutions or who run microfinance banks should have the basic standards to meet that will assure the government and public that you have the capacity to run the business. After they have done that, the government should have a way of pushing resources to them, but that is not happening in our society. You will discover that the money in our society is actually sitting with the commercial banks and you want the microfinance to fire the engine of growth of SMEs, from where? The government money is with commercial banks, the individual money is with commercial banks, the corporate money is with commercial banks. In fact, I can even tell you that except in few cases; most of the people that come to the microfinance banks come only to take loans. When they have small savings, they take it to the commercial banks and those commercial banks will never attend to their loan needs, and these are the loans that the SMEs and the low income people need to be able to grow and change levels. Therefore you cannot put the blame entirely on the operators alone.  It’s a societal thing. The government promised in 2005 to create a microfinance fund, that is not done till date. They later created MSME Fund that was hijacked by the commercial banks and state governments.

Secondly, you know that in our own society when people see a new line of business, as long as they feel that there is money to make there, they just go and look for money and go into that line of business. People don’t think about the fundamentals of that industry, they don’t think about what are the success factors, because most people in our society believe money is what it takes to do a good business. My interpretation is that many of the people we call investors and entrepreneurs are just traders, you know it’s a trader that just wants to sell goods and just make margin and move on. Investors and entrepreneurs think of long term. That mentality is part of what is affecting the industry; it is making even the operators of MFBs to think the attractive thing is to be like the commercial banks. I think otherwise. The opportunity in the microfinance sub-sector is huge. You should also remember that many people that came to manage MFBs were people from commercial banks, particularly after the consolidation of commercial banks in 2005. That is what they know how to do and many of them are modeling their MFBs after their knowledge of commercial banking. Knowledge will help anyone to know that you can become anything you want to become without copying the commercial banks. You can learn from them, but you cannot run MFB with the mentality of a commercial bank.

But I must add that the rate at which microfinance operators chase after being like commercial banks has drastically reduced because the knowledge level is increasing in the system. The Central Bank of Nigeria (CBN) has supported the industry’s knowledge base since 2010 by ensuring that all the management staff of microfinance banks are trained and certified. Aside that, there have been other initiatives that have helped the knowledge base in the industry. Like the way the commercial banks have the Financial Institutions Training Centre, we also have a training centre that is basically for the microfinance banks and that has helped us a lot. We also have a number of players from outside Nigeria, who have done it in other places; they have entered with the knowledge from better developed climes. Operators are now exposed to a number of international trainings.

Do you think microfinance banks undercapitalised, and what do you think should be the minimum capital base for a microfinance bank?

That’s a very difficult question to answer. It depends on where you are. For example, if you are operating a unit MFB in Lagos, N20 million is not enough for you to open even a shop. Particularly in the city centres, that amount cannot take care of your expenses. By the time you take a five-year lease, acquire software and computer system; you don’t even have money to pay staff for the next six months. Normally, the six-month period is the time you are processing license, training your take-off staff, trying to study the market and crafting out your strategies. And don’t tell me MFBs are supposed to operate only in the rural areas. There are poor people everywhere and all of them must be attended to. People also erroneously think they can run MFB with customer deposit. In reality, your loan portfolio must be greater than your deposit portfolio at all times. So you really need strong capital and other funding to do well in this business.

But there are MFBs in the rural areas that don’t even have what to do with N50 million. For those people, asking them to bring N200 million will be counterproductive. In fact, there are some of them that what they do is to place all their money with the commercial banks and be waiting for monthly interest from the commercial bank.

Therefore, the issue of whether somebody is undercapitalised is more of a personal thing, like I said; anyone that knows his onions will not wait for the CBN to increase the minimum capital before he looks for more money; because regulatory capital is what CBN is controlling, regulatory capital does not necessarily make you to do well, it’s too small. It is the minimum you required to remain in business in the short and medium term. We must all continue to beef up our capital and other funding even without the CBN asking us to do so.

For us, even without having minimum capitalisation issues, before CBN thought of new capital benchmark, we have always looked for more money. When we got debt from outside Nigeria; it was not the CBN that asked us to do so. Money is our stock in trade and we must continue to look for more of it. We don’t see it as unusual for CBN to ask for new capitalisation in accordance with reality. It’s what should be expected. The CBN set the current capital benchmark when naira was going for N150 per dollar. Today, it is above N380 per dollar.  This is an indication of the value of naira, the purchasing power and inflation effect over the period. If you started a unit MFB with N20 million then, and you are still running with that N20 million, you will discover that it’s going to become very difficult for you to be able to cover your cost. So the issue of the new capital requirement as much as it is painful and demanding, it is what we should expect from time to time. It is not only the minimum capital that the CBN is changing; even the regulatory guideline is changing completely. Prudential guideline we are using now was launched in 2005 and reviewed in 2011. There is a new one that is coming out with more stringent requirements.

For us as an organisation, before the new capital requirement came, we were far ahead of the minimum capital required for the type of license we currently operate with. When we needed N100 million as minimum capital, we were actually operating with capital above N1 billion.  As operators, we must recognise the fact that there is a difference between regulatory capital and business capital, or what you call operational capital.

Talking about investors and investments, to what extent have you been able to justify investors’ confidence in your bank?

From what I have said so far, you can see that the investing public has confidence in us. By investments, we are not only talking of shareholders, we are also talking of people who give us debt funds and deposit. One thing we have achieved as a microfinance institution is that the kind of money that people could not place with a number of our peers, they have confidently placed with us over time. You have people taking their money from commercial banks to give us. It is a show of confidence in the capacity and integrity of our board and management. We also invest in our staff so that they can hold their heads high anywhere they go and anywhere they represent the bank. All our board members have undergone some of the best international trainings in corporate governance and risk management. You can see we have been able to grow our asset size from about N2.4 billion in December 2018 to N5.2 billion in December 2019. We have also seen a lot of people that are also indicating interest to partnering with us one way or the other. We have local and international partnership interests. Banking is a business of trust and all these are demonstration of trust and confidence the society has in us.

Without prejudice to the importance of MFBs, do you by any chance have plan to scale up to being a commercial bank?

First of all, we have to know that having a commercial banking license is never the ultimate. There is enough business in the microfinance sub-sector, if you know what to do and you have the resources to do it. The potential in our space is very huge. The number of people in poverty in Nigeria is very high, according to global statistics. And the number will continue to increase because our population is increasing. You also know there is no clear plan in place to check our population. Therefore, the microfinance market is growing daily.

For me, getting commercial bank license is not a priority for us now. Of course, I am just one person on the board. The board may have a different opinion on this. For me, we would rather be looking at creating a group first. There are other businesses that you can create within the microfinance sub-sector, related businesses and if you now have a group, the directors can decide whether we need to go into commercial banking or not.

What is your view on CBN passing its N50 billion intervention fund through only one MFB?

I am not holding brief for the CBN, only CBN can tell you why they decided to pass N50 billion through one MFB out of about 1000 MFBs, all of them licensed by the same CBN. It is also noteworthy that the MFB so chosen by CBN is about the youngest MFB in Nigeria. We have operated under CBN regulations for 11 years now. The one they gave the money to is less than two years in operation. My own opinion is that CBN will soon come with something that will go round all of us. I expect they will set conditions that any MFB that meets such conditions will be able to access the intervention fund. The problems we are facing are multifaceted and only one entity or only one intervention cannot solve the problem. That one institution cannot be everywhere or attend to everyone. I believe the CBN will certainly do something to ensure intervention through other MFBs. Not only for the survival of those MFBs but also to ensure the impact of government’s efforts is felt everywhere and by many citizens. The CBN in my opinion knows better than to create another monopoly in an effort to alleviate poverty. There are reasons why CBN most of the times always passes its interventions through third party institutions. I think one of the reasons is that the CBN does not have the structure to reach all the citizens at the same time. From our various engagements with the CBN on the matter, I believe the CBN will come up with further interventions that will reach all of us. I also look forward to CBN relaxing the loan provisioning guidelines to accommodate some of the loans we have restructured because of the impact of COVID 19.

Poverty as a problem in our society is so big that one million entities cannot solve all the problems. So, the apex bank should not see its new entity as a substitute to the more than 800 MFBs that have been on ground, all of them licensed and regulated by the same CBN. We will solve the problem better and faster by collaboration rather than by competition or a government-induced monopoly. When the CBN came out with the Microfinance Policy Regime in 2005, investors responded not because they don’t have other things to do with their money, many came into the microfinance space based on the faith in the credibility of the CBN in addition to their own individual profit motives.