The Nation Newspaper

Category: Issues

  • Fairs of economic revival

    Fairs of economic revival

    For years, the Lagos Chamber of Commerce and Industry (LCCI) has held the Lagos International Trade Fair. This year’s, the 27th in the series, with the theme: ‘Harnessing trade potential for an inclusive economy’ has come and gone. What has this fair achieved over the years? Has it helped in stimulating the economy through foreign direct investment (FDI)? Or is it just an avenue for companies to exhibit products? Okwy Iroegbu-Chikezie reviews the fair.

    As usual, crowds thronged the Tafawa Balewa Square (TBS) venue of the 27th Lagos International Trade Fair held between November 1 and 10. They came mainly to buy goods at cheap prices. At trade fairs, it is generally believed that goods are cheaper, compared with their prices at retail shops. So, shoppers flocked to the fair to get things which they had been planning to have for long. But is this the goal of a fair? According to the organisers, the Lagos Trade Fair, like others, was targeted at Nigerian enterprises seeking wider access to internal and international markets as well as investors seeking joint-venture partners and markets for intermediate and capital goods in Nigeria and the Economic Community of West African States (ECOWAS) member-countries.

     

    Objectives of the fair

    The Chairman, Trade Promotion Board of the Lagos Chamber of Commerce and Industry (LCCI), Mr. Babatunde Paul Ruwase , said the fair was to create a platform for economic growth through a deliberate exposure of the nation’s potential to the outside world.

    Other reasons were to revitalise and diversify the economy, especially non-oil exports, accelerate development of commerce and industry and encourage patronage of made-in-Nigeria products.

    Ruwase also said the fair was to encourage agriculture and agro-based industry, the evolution of Nigeria’s trade with the outside world, focus attention on the role of the private sector in the Nigerian economy and to explore the prospects for foreign and local investments in strategic areas.

    LCCI President Mr Goodie Ibru said the theme of the fair, “Harnessing trade potentials for an inclusive economy,” was chosen to underscore the critical importance of trade and the value of inclusiveness in the economic growth process. He said, among other things, it was to stress the fact that the quality of the investment climate and sectoral linkage have a lot to do with economic advancement of the country and the welfare of her citizens.

    Ibru stressed that the trade expo was premised on the need to ensure that there are sufficient linkages in all aspects of the economy. He listed the linkages between the oil and gas sector and the rest of the economy; the financial sector and the small businesses; large enterprises and the small businesses; between our consumption and our production and between our industries and our agricultural sector.

    His words: “There is the need to ensure that our national economic management model is structured to capture maximum value from domestic spending, foreign direct investments and other economic activities and how best can this be achieved if not through a well thought out trade fair that is well structured and inclusive of all stakeholders.”

    He observed that for a developing economy like ours, protection of our industries and firms is good and desirable, but making them domestically and globally competitive is fundamental as it is the surest path to sustainable development. The LCCI chief said the trade fair couldn’t have come at a better time than now when the government endorsed the new Common External Tariff (CET) by the Council of the ECOWAS Heads of State and Government to benefit from the economic integration of the region.

    President, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Alhaji Muhammed Abubakar, said the fair would serve as a catalyst to economic development of country. It would increase FDI in information technology, oil and gas and other strategic areas in addition to promoting the value of individual linkages and inclusive growth, he added.

    The NACCIMA boss said trade fairs provide an opportunity for policy makers to appreciate the fact that the private sector needs the appropriate policy to thrive.

    He said: “No economy is an island but every economy needs the appropriate policy to be competitive. The private sector needs to be supported a great deal by government to drive the trade potentials of the country and a well planned and executed trade fair provides the platform.”

     

    Experience from the fair

    Rusawe said the over 500,000 visitors and over 1,000 stands showed that the nation’s economy is viable and attractive to the world.

    Wondering why the economy has not grown beyond the level it is, he concluded that the nation must be doing something wrong, despite its huge resources.

    According to Rusawe, the policy makers must as a matter of urgency investigate why foreigners, especially of the Asian countries stock, come here and succeed in every area of business even with something that needs no skill as pedestrian as in retail trade while our people fail. That those who participated last year came back this year in addition to huge foreign participation shows that trade fairs are a necessity in the economic growth of any nation, he said.

     

    Exhibitor’s remarks

    The Consul-General, Arab Republic of Egypt, Abdel Halim, called for increased trade and investment relations between Nigeria and his country.

    He said Egypt’s doors were open to genuine businessmen from Nigeria, adding that the relationships would provide a platform for discussing challenges that might arise in the enforcement of the Egypt Investment Promotion Act on Retail Trading.

    According to him, the Retail Trading Act is to ensure that foreigners who engage in businesses in Egypt abide by the laws of the country.

    Halim listed investment portfolios in Egypt to include tourism, energy, agriculture and fi nancial services.

    He said the Egyptian Government had provided incentives, including tax rebates, for foreign investors. He said no fewer than 10 Egyptian exhibitors participated at the Lagos Trade Fair to showcase some made-in-Egypt products.

    “All our products are natural; our perfumes on display were without any chemical addition. Some of the natural oils are medicinal and produced under hygienic condition,” he said.

    To him, the fair was an opportunity for the Egyptians to introduce more products into Nigerians.

    Patronage at Ghana, Indonesia and India stands was good in terms of sales and investors while China Pavilion was a beehive of activities with visitors and prospective investors because of mostly the cheapness of their products.

    While some of them said the sales were poor, others said they had got people interested in continuing business relationships with them after the fair.

    One of the exhibitors at Akwa Ibom State stand, Mr Godswealth Henry, managing director, Jekon Integrated Farms Nig. Ltd., producers of RIV Pam Red Palm Oil, said his outing was impressive.

    “Visitors to our stand and patronage in terms of sales and prospective investors are encouraging.

    “I am happy to be at the 2013 Lagos Trade Fair. The idea of the Akwa Ibom Ministry of Commerce bringing us to participate is being achieved.

    “We are into edibles, that is, adding value to farm products so that it meets international standards for export.

    “Our presence at the fair is to get investors in Lagos to be able to evaluate the acceptance of the product when we start exporting them,” he said.

    Another exhibitor from Cameroon Stand and Managing Director, GIC Laboratoire Gefeh, manufacturers of herbal medicine, Mr Ngwei George, said visitors had been enlightened on efficacy of herbal products.

    “Our products are made from tree roots, leaves or seeds and we work with the Ministry of Health, Cameroon.

    “All the products on exhibition are certified by the Cameroon Government laboratories. We have different uses for cocoa seeds.

    “For example, from the cocoa butter made from cocoa seed which is medicine on its own, we produce soaps, hair creams and lotions, among others.

    An exhibitor at Abia State stand, Mr Cosmos Onyeibe, however said the sales were poor and that the stand was too small to accommodate about 17 exhibitors that came with the state government.

    “We are not happy with this year’s Lagos Trade Fair; see, this stand is too small; we are 17 exhibitors and we do not have enough room to exhibit our goods.

    Managing Director, Dusco-Designers International, Mrs Olufunmilayo Ige, a manufacturer of female hand bags, shoe and jewelry from Aso-oke and Ankara fabrics from Osun State said the state government still has a lot to do in areas of making affordable finance available for SMEs. She complained of low sales at the fair and said though she has had visitors visit her stand and appreciate her goods there has been no effective demand.

    Another entrepreneur and Curator of Genesis Arts Gallery Mr Adeyinka Fabayo from Osun State also asked for financial assistance from government to purchase the necessary machines that are capital intensive. He said the fair just like any other is good for exposure and not necessarily cash sales.

    Another entrepreneur Mrs Iyabo Oyebamiji who manufactures local fabrics also complained of low sales.

     

    Advantages of the fair

    ‘’We are excited to see business deals signed and taken to the next level which is a testament that the trade fair is a veritable ground for businesses enterprise and cooperation said Ruwase. Our efforts at putting in place a business to business meeting room at the fair was not in vain seeing the many strategic unions and engagement that came out of it.

    ‘’Many states attended the fair and displayed their products which if harnessed can take the nation to greater heights in her quest for economic prosperity, he added.

    According to him, what some of the state governments need to do is to encourage their SMEs by not only providing funding and soft loan for them, but also an enabling environment in terms of the provision of necessary infrastructure, capacity building and helping with regulatory issues.

    Rusawe said it was at the fair that the Ogun State Government disclosed that it had released N1 billion to the state SMEs to assist them in running their business. He argued that some of those the fund are meant for might not have known about it and would continue to struggle to source for funds for their businesses.

     

    Lessons learnt

    Rusawe said the announcement of President Goodluck Jonathan at the opening ceremony, on the efforts of the government concerning power generation and distribution and the hand-over of the Distribution companies (DISCO) to investors is an eye opener.

    ‘’We are in a vantage position to appreciate the efforts of the government in power generation, especially as far as the investment of the government in that area is concerned. More states have also said that they have created industrial clusters, but, unfortunately, we are not seeing the effect because when the environment is tough the poor feel it the most,” Rusawe said.

    He also noted the observations of some exhibitors and visitors and promised that next year’s event would be bigger and better.

     

    Challenges at the fair

    The most challenging part of the fair is having to construct the boots yearly and they are only useful for a week or at best two weeks. He said the chamber was clamouring for a more permanent arrangement and a purpose built complex that is suitable for trade, expos and exhibitions. Some exhibitors, however, expressed their satisfaction with the venue due to its centrality bearing in mind the poor state of the Lagos /Badagry Expressway. Some exhibitors said their challenge was poor publicity which they said made attendance to their stands poor limiting their visibility and possible sales they would have made.

    On the heels of that, Rusawe asked the Federal Government to expedite action on the transfer of the purpose-built Lagos International Fair Complex at Lagos/Badagry Expressway to the chamber as had been done for Kaduna and Enugu Chambers of Commerce.

    He said: “We are wondering why the purported concession which was adjudged to be faulty has been allowed to stand to this point in time. LCCI is impressed that government has thought it wise to go to court but not excited because the court process may drag forever.”

     

    Government remarks

    President Goodluck Jonathan said the government recognised the place of trade fairs in the economic development of the country. He said that was one reason the Federal Government was taking the legal option to take over the concessioned Lagos International Trade Fair Complex on the Lagos/Badagry Expressway because of the faulty privatisation process.

    He said his administration was poised to increase trade on three levels — international, ECOWAS and internal trade as it has realised its potential for economic growth.

    Jonathan, who was represented by the Minister of Industry, Commerce, Trade and Investment Dr Olusegun Aganga, said the government’s interest in the fair is also based on her belief that SMEs are the engine room of growth for any economy judging from the success story of the Asian Tigers.

    He noted that with 17 million SMEs, employing 32 million people, the government was on its way to economic prosperity.

    Jonathan also announced the tariff differential of 70 per cent that will make it more expensive to import when there is local alternative.

  • How funding is stalling agricultural growth

    With the economy looking up, agricultural enterprises are considering new investments. But financing is a major challenge. Daniel Essiet reports. 

    In the early 1960s and up to the late 1970s, agriculture was the mainstay of the economy. That was the period when we had the phenomenal groundnut pyramid in Kano, cocoa in the defunct Western Region and palm oil in the defunct Esatern Region. The story has since changed, no thanks to the oil boom of the 1970s.

    Over the last two decades, successive adminstrations in the country have paid lip service to improving the fortunes of the sector to enable it add substantially to the nation’s gross domestic product (GDP).

    Challenges such as access to funding, Land Use Act, subsistence agriculture and others have continued to bedevil the sector.

    Dr Lanre Talabi is a frontline agro entrepreneur who runs a large-scale commercial farm. His firm, Talon Nigeria Limited, is an agro-based research and development company involved in bringing cost-effective, sustainable and appropriate technology and management know-how to bear on food, agriculture, fisheries and the environment.

    Speaking on the problems confronting the agric sector, he singled out dearth of loanable funds as the most paralysing.

    He said: “I must say that our main problem as agricultural scientists in this country, is funding. I cannot understand why government is still allowing the banks to operate they way they are operating. I find the banks not living up to their billing. Government has given them so much leeway to do what they like.”

    He accused the banks of being interested in collecting money and making things easy for themselves and difficult for others, wondering why an average young person finds it very profitable selling naira notes on the streets and bus terminals.

    He added: “They are not giving loans to the real sector; they are just using the money for the deposits they collect from their customers for own comfort. The solution is to do what the Indian government did with the National Bank for Agriculture and Rural Development (NABARD).

    “We just need financial institutions like finance houses and community banks. These are the ones we should be dealing with. We should not be dealing with commercial banks at all. They have failed us. They are the ones causing inflation.”

    Sometimes, grass grows tall. Clearing large swaths of farm land from this grass requires money. Other challenges, he identified which requires money, are getting equipment transported from the farm to farmers’ hubs and securing financing for projects. Larger farm operations are capital intensive, using more equipment and machinery, he stated.

    He said farmers need better access to capital, credit and small operating loans. These are critical for business start-up and expansion. Years spent seeking loans to expand his business has left him disillusioned with the attitude of banks towards financing agriculture. He has approached several local banks that were willing to lend to him, but only at a rate higher than 25 per cent interest.

    Talabi said enough has not been done to support farmers financially. He said the challenges of securing finance to carry out farm operations have restricted many people from entering the sector.

    Agricultural bankers, he explained, have ample funds for farm loans, at high interest rates. Talabi is not the only farmer having negative things to say about the attitude of banks.

    After a few tough growing season, the President, Federated FADAMA Community Association, Lagos State, Alhaji Abiodun Oyenekan, expressed concerns about banks reluctance to finance agricultural investments, saying a lot of farmers are not able to meet their operating expenses because of poor access to finance.

    The agricultural environment, he noted, still has a long way to go with regard to access to finance for farmers.

    Speaking with The Nation, a fish farmer and processor, Alhaja Nurat Omotayo Atoba, said agriculture lenders continue to service the industry and many have taken on new loans even with tighter credit standards.

    She said credit availability hinges on collateral values and profitability in an era of risk, adding that the banks have tightened credit standards for loans. While agricultural borrowers may be concerned about credit availability, agricultural lenders are equally concerned about the creditworthiness of agricultural borrowers as the farm economy weakens.

    Although agricultural lending seems to be rising, obtaining finance still appears to be more difficult for farmers. This is because they have less equity. On the balance, farmers present greater risks to commercial banks. As a result, Oyenekan, said, farmers face tighter credit markets and higher collateral requirements.

    He said financing is needed to enable farmers to use improved input and better on-farm practices to increase supplies and improve yields, as well as generate enhancements in quality and better post-harvest practices. Oyenekan, explained that across the country, lack of access to finance continues to persist especially for farmers, despite recurring interventions both by the public and private sectors. Lending to the agricultural sector is unattractive due to high costs, high risk, and low returns.

    The Director, African Region, Cassava Adding Value for Africa(C:AVA), Dr Kola Adebayo, told The Nation that the government and banks need to adopt agricultural finance to reflect agricultural cash flow cycles.

    He said farmers face challenges in securing finance because many banks don’t participate in agric lending, arguing that bankers regard farming as too great a risk to fund. For this reason, banks require additional collateral. Stakeholders complained that they work with loan officers with little or no knowledge of agriculture. Because of this, they can only treat loan requests on working capital; investment, machinery and equipment for various activities, such as crop production, animal husbandry (meat or dairy production), aquaculture, chicken farming and apiculture.

    Oyenekan said the presence of microfinance institutions has not been felt in the agric sector, adding that minimalist microfinance is not enough as credit alone is insufficient to raise agricultural productivity.

    Addressing a forum organised by Lagos Business School, the Managing Director, Best Foods, Emmanuel Ijewere, said when banks understand farmers, they will be able to structure their payment schedules and better evaluate their repayment capacity.

    Unlike with typical short-term loan schemes, he said agricultural loan products must reflect the unique characteristics of agricultural production, noting that products must cater for seasonal production with long and diverse gestation periods.

    He said agriculture is very seasonal with long gestation periods, from planting or livestock birth to harvest or slaughter. The result is that cash flows are highly seasonal and sometimes irregular, with earnings concentrated in certain times of the year.

     

    Long-term financing

    The Programme Corodinator,Farmers Development Union (FADU), Mr Victor Olowe, said there are challenges to farmers looking for long-term financing for investments in agro businesses such as planting of cocoa or cashew trees. This is because cocoa takes three years before it can bear fruits. Banks have few instruments at their disposal to manage the risks arising from the agricultural sector.

    However, agricultural borrowers’ assets are less suitable as collateral. In fact, farmers and their producer associations frequently lack the collateral traditionally required by banks for larger and longer-term loans.

    Due to legal and administrative impediments as well as cultural factors, rural assets are often not registered and consequently may be more difficult to foreclose and sell. Even where these constraints are less binding, collateral is a poor protection against massive defaults due to covariant risks.

    Government programmes

    Access to capital through credit has always been a challenge for farmers, given the inherent risk of farming. For that reason, the government is working with the Central Bank of Nigeria to make subsidised loans and to guarantee loans through private lenders. This is because commercial lenders are hesitant to make loans to farmers. The Nigerian Incentive-Based Risk Sharing System for Agricultural Lending, introduced July last year, guarantees up to 75 per cent of bank loans to the sector.The initiative, which is the brainchild of the CBN, the Bankers’ Committee and the Federal Ministry of Agriculture and Rural Development, seeks to create incentives and catalyse processes to encourage the growth of formal credit, direct and indirect, for the agriculture value chain, as a mechanism for driving wealth creation among value chain participants.

    According to the central bank, it plans to spend an estimated $500 million to create further incentives for the banks to sustain the flow of agriculture credit.

    There is also a risk-sharing facility of $300million, planned to address banks’ perception of high-risks in the sector by sharing losses on agricultural loans. There is equally an insurance facility of $30 million intended to expand insurance products for agricultural lending from the current coverage to new products, such as weather index insurance, new variants of pest and disease insurance.

    Besides, there is also a technical assistance facility amounting of $60 million meant to equip banks to lend sustainably to agriculture, producers to borrow and use loans more effectively and increase output of better quality agricultural products, among others. The increase has been linked to the N200 billion agriculture credit scheme and N600 billion NIRSAL. The current improvement in the sector was also linked to access to credit through the new policy focused on increasing private sector participation, emphasis on the entire agriculture value chain, and using agriculture to boost employment, wealth creation and food security.

    The CBN explained that with the credit trend emanating from the banks, Nigeria might be close to winning its economic diversification objectives that would lead to less dependence on oil.

    It said: “The NIRSAL is one single programme that has brought banks back to their role of intermediation for national economic development. For the economy to be diversified and sustainable development achieved, agriculture has to be given a pride of place as largest employer.

    ‘’The funding is therefore important for the agric sector but for that to be effective the sector needs to be stripped off inherent risks that impair bank lending.”

    Oyenekan said the farmers are yet to feel the impact of NIRSAL.

    He wondered where the loans guaranteed by the programme is going as real farmers are not benefitting from it.

    Right now, only a handful of loan and grant programmes exist specifically for farmers, but finding them and then filling out the required paperwork can itself be a full-time job. Mainstream commercial bank loans continue to be scarce. The Commercial banks also require income and equity beyond what most beginning farmers have.

     

    Farm profits and debt shapes credit

    availability

    To watchers, profitability will shape the amount of credit that will be available to farms. Watchers believe stronger farm incomes, coupled with a resurgent economy, should help improve access to credit. With improved profitability, farm debt levels could remain low, further enhancing credit access. Still, agricultural enterprises facing weak profit opportunities and high debt levels will find obtaining credit difficult.

     

    Banks

    Bank deposits are a major source of loanable funds for agricultural banks. The risk is that lower interest rates on cash deposits and other savings vehicles could slow bank deposit growth, limiting funds available for agricultural loans. Farmland is a major source of collateral for agricultural loans, especially for smaller agricultural banks. The decline in farmland values could shrink the amount of collateral available for agricultural loans.

    For banks, the primary source of repayment is usually the farm’s conversion of working capital into cash flow through the production season. If, for some reasons, this conversion fails to generate sufficient cash flow to service the loan requirements, the bank has to consider other options, many of which are still dependent on the farmers’ ability to generate cash flow or liquidate various assets to repay the loan.

    For some banks, agricultural financing involves higher transaction costs than in urban areas given distances, lower population densities, and lower quality infrastructure.

    Together, these factors make it hard to aggregate agricultural loans into portfolios that make branches viable. In addition, it can be costly to have branches and staff in remote areas handling small transactions.

    Olowe said loan repayment is poor among farmers. As a result, overall industry averages mask some of the financial risks in the agricultural sector that could arise with high debt levels.

     

    Farm financial stress

    It can be defined as the inability to meet debt service payments, including principal and interest. The primary determinants of financial stress are the level of debt, its cost or interest rate, and the amount of farm income available to service the debt. Low interest rates and high income improve debt repayment, while higher interest rates and lower income do the opposite. In recent years, ome agricultural enterprises have seen incomes fall, leaving some producers with elevated levels of financial stress. Farm financial stress arises when producers lack sufficient income to service their debt at current interest rates.

     

    Financial needs

    Producers and rural entrepreneurs require access to a dedicated, specialised lender to meet their complete credit needs.

    A broad range of processing, marketing and other agriculturally related businesses on which farmers depend requires ongoing access to reliable, flexible financial products and services to compete in a rapidly changing business environment. Rural Nigeria and agriculture need investors and financial/business partners to meet the growing requirements of rural entrepreneurs and to fuel economic growth in rural communities.

     

    Capital Management

    Farms have become more capital intensive than ever, requiring greater management of farm capital, including land and machinery. The decision to own versus rent-or to contract agricultural services are taken to maximise overall enterprise value, which comprises both asset value (what is owned) and operations (how profits can be made). An increasing number of farmers are taking advantage of renting and crop-share opportunities in order to focus on their operations-and others are finding it more profitable to rent some of their land to other operations than to farm it themselves.

     

    Prospects

    The agricultural landscape is changing. However, farming retains some long-standing characteristics, including an industry structure built largely around family ownership and operation. Significant economies of scale are still not a dominant force in the industry’s organisation, owing to the history of the sector’s development and the seasonal nature of farming work. This is unlikely to change in the foreseeable future, even as farms continue to get larger as a result of greater business sophistication, entrepreneurial ambition, and economic necessity. A relatively small proportion of microfinance loans are used to finance crop farming enterprises; most are taken to finance trading and processing activities, for livestock or for consumption. There are many reasons for this, including the usual terms, amounts and repayment schedules, which do not fit the financial requirements of farming, and the predominance of women borrowers.

    Recently, the Central Bank of Nigeria (CBN) emphasised on banks’ lending to agriculture. Rising demand for agricultural commodities as well as increased competition in urban areas have prompted financial institutions to reconsider working with this sector.

    Lenders are beginning to recognise the growing potential and profitability of lending to agricultural enterprises.

    Lagos Commissioner for Agriculture and Cooperatives, Prince Gbolahan Lawal, has been on the vanguard of bringing more people into farming by providing low-interest loans.

    He said the Lagos State government was ready to support young Nigerians to make a living through agriculture.

     

    Recommendations

    Adebayo said financing agriculture is more effective when it is part of a broader package that combines both financial and non-financial services to the farmers with the objective of improving yields and quality and ensuring access to markets for selling their produce.

     

  • Banks’ many challenges

    For some banks, these are not the best of times. Their earnings released in the third quarter, which ended in September, are being affected by changes in the Central Bank of Nigeria’s (CBN) policies. COLLINS NWEZE writes that the coming years may be tough for banks as the policies take root in the financial system

     

    •CBN’s policies take toll on lenders’ operations

    Banks have been under pressure in the last few months following some policy changes at the Central Bank of Nigeria (CBN). The aim of the CBN Governor, Sanusi Lamido Sanusi, is to keep the naira stable, check fraudulent use of foreign exchange (forex), reduce cost of banking operations and shift banks’ interest from public sector deposits to private sector funds.

    The policies, include a raise in Cash Reserve Ratio (CRR) for public sector deposits to 50 per cent, increase in Asset Management Corporation of Nigeria (AMCON) fees from 0.3 to 0.5 per cent, suspension of the Wholesale Dutch Auction System (WDAS) and its subsequent replacement with Retail Dutch Auction System (RDAS).

    The CBN also reduced banks’ Net-Open Position Limit (NOPL) to one per cent, and a 48-hour limit on the use of forex purchased from the RDAS. By December 2016, CBN said it would stop being the “lender of last resort” for the Real-Time Gross Settlement System in the banking industry.

     

    CRR hike

    The CRR is the minimum cash, as a percentage of customer deposits and notes that each commercial bank must set aside in CBN reserve. This cash cannot be used for other purposes or lent out. The CBN took this step to protect depositors, and ensure banks have sufficient cash at all times to meet the day-to-day demands and cash withdrawals of their depositors. The CRR is a powerful monetary tool often used by central banks all over the world to control money supply in the economy. This is where it gets murky.

    At an average CRR of 17 per cent, this means that Nigerian banks are setting aside more than twice the cash set aside by Kenyan banks for every one dollar of customer deposits. In addition, Nigerians are setting aside 10 times the cash set aside by its Kenyan counterparts for every one dollar of public sector deposits.

    Like bitter pills, these policies are being swallowed by the banks, albeit with silent grumblings, but not without serious implications on the earnings and cost of operations.

    Piqued by this development, Equities Analyst at Renaissance Capital (RenCap), Adesoji Solanke, asked: “Is the CBN now creating an increasingly difficult operating environment, under which some banks cannot hope to deliver returns in excess of their cost of capital?” The thinking in many circles is that banks are indeed facing a challenge in trying to deliver over 20 per cent returns, especially compared with its sub-Saharan African (SSA) peers.

    While some banks are able to face the hurdles created by these changes in regulation, so many especially smaller lenders have come under intense pressure.

    Solanke said the least vulnerable banks to the CRR hike are Stanbic IBTC and Guaranty Trust Bank (GTBank), with exposure to public sector funds at five per cent and eight per cent respectively. The remaining banks are in the 10 to 16 per cent range.

    He explained that CRR is at 12 per cent for customer deposits and 50 per cent for public sector deposits, resulting in a average CRR of 17 per cent while in Kenya, the CRR is at 5.25 per cent, slightly lower at five per cent in Rwanda and nine per cent in Ghana. Solanke said other challenges in the sector include a reduction in Commission on Turnover (CoT), an increase in the AMCON levy and the introduction of a minimum savings rate.

     

    Implications for banks

    Analysts said the lenders will, in the midst of these tough policies, be left with little choice but to pursue revenue growth by raising lending rates on their loan books. However, this is likely to come at the expense of either loan growth or asset quality. The larger, more liquid banks may prefer to accept lower loan growth, and instead increase their exposure to treasury assets as yields have risen slightly remaining attractive choice for investors.

    The fact remains that with these policies, high earnings growth is likely to be challenging to achieve. “We expect it will become harder for some of the banks to deliver returns in excess of their cost of equity, especially some of the smaller banks. Our preference in this environment is for big-balance-sheet players, with excess liquidity,” he said.

    For instance, fee income analysis showed that CoT fees were fairly significant contributors to non-interest revenue (NIR) in 2012, especially for the larger banks. In 2012, CoT contributed 40 per cent to NIR for Zenith and FirstBank and 12 per cent and 10 per cent to total income. The least affected of the lenders was Access Bank at 14 per cent of NIR and five per cent of total income. Of the Tier 2 banks, Diamond, First City Monument Bank (FCMB) and Skye were the most affected, while Stanbic IBTC and Fidelity were the least.

    However, bigger banks are better positioned to weather the headwinds, given larger balance sheets and better economies of scale. Many of the banks with illiquid AMCON bonds are also under serious revenue threat. “We believe this will remain a challenging year for Access given the nature of its balance sheet (large exposure to illiquid AMCON bonds). We think 2014 should be a year of stronger growth for Access, as most of the AMCON debt matures at the end of this year and will be redeemed for either cash or t-bills – giving Access the opportunity to earn better returns on its assets,” a RenCap report said.

     

    Third quarter performance

    Already, Access Bank’s unaudited financial report for third quarter obtained from the Nigerian Stock Exchange (NSE) also showed that the bank’s profit before tax fell by 10.26 per cent to N35 billion, compared to the N39 billion recorded in September last year.

    The bank’s operating income also declined by 7.96 per cent to N104 billion during the period under review, from N113 billion as at September last year.

    However, the operating income improved by four per cent from N34 billion in second quarter, to N35 billion in third quarter.

    The bank’s Group Managing Director, designate, Herbert Wigwe, admitted that the impact of on-going regulatory development has affected the overall operating environment in 2013. “Our medium term strategy puts us in a strong position to cope with these industry headwinds as evident in the improved operating performance in third quarter which I believe will provide the platform for achieving our goals in 2014 and beyond,” he said.

    Skye Bank Plc also declared a N102 billion gross earnings for the third quarter ended September 30. The figure represents an increase from N94 billion in the corresponding period of last year. “The strong core profitability muted the adverse impact of industry-wide cost headwinds on the net bottom-line of the bank. Various regulatory policies and tightened liquidity including the introduction of 50 per cent CRR on public sector deposits have generally put pressure on profitability margins of banks,” the bank said in a statement.

    The bank’s operating expenses-including regulatory costs and fees, increased from N 7.19 billion to N33.89 billion. This resulted to an increase in total operating expenses to N47.17 billion as against N34.24 billion recorded in comparable period last year.

    Group Managing Director/Chief Executive Officer, Mr. Kehinde Durosinmi-Etti, said the results have demonstrated the capacity of the lender to sustain continuous improvement in major performance indices. He said the moderate growth was commendable in the context of the several regulatory policies and tightened liquidity which has constrained profit margins across the industry.

    He noted that with the tightened regulatory policies, increased levies and general operating costs, the bank will continue to improve on its processes and cost reduction strategies while it continuously explores other ways of generating revenues and enhancing value for shareholders.

    “We will use more of our electronic platforms and distribution channels, while we invest more in technology to serve our customers better. Our customers will continue to experience secure and convenient service with our newly launched Customer Service Charter, which was pivoted on transparency, accessibility accountability and reliability,” Durosinmi-Etti,” said.

    However, Stanbic IBTC improved on their earnings amidst these regulatory hurdles.

    Stanbic IBTC Holding Co. reported nine-month profit increased 64 per cent. The bank’s net income climbed to N16.9 billion in the nine months through September, from N10.3 billion a year earlier. Non-interest income gained 70 per cent to N36.4 billion.

     

    Earnings dip

    All other things being equal, analysts expect net interest margins (NIMs) to suffer. Banks have said they are reducing deposit rates for public-sector deposits to try and offset the higher CRR. “We do not think this will be sufficient, and we note also that the introduction of a minimum savings rate on 1 April 2013 (set at 30 per cent of the Monetary Policy Rate (MPR) has increased pressures on the funding side. We cannot see how banks can hold on to their NIMs without raising lending rates.”

     

    Loan re-pricing

    Chief Financial Officer (CFO) Wema Bank Plc, Tunde Mabawonku, said many banks repriced their public sector deposits after the CRR policy became effective. He reiterated the bank’s commitment to ensuring that its public sector deposit does not exceed 10 per cent of its deposit liability.

    “After the Central Bank of Nigeria (CBN) policy on public sector funds became effective, we began re-pricing our public sector funds. It hurts us that we lost some funds, but it is better to remain profitable than to be big and unprofitable. We intend to keep our public sector deposits below 10 per cent of our total liability,” he said.

    Findings also showed that most management teams agreed to raise lending rates by 100 to 300 basis points after the CRR policy. Expectedly, high-end corporates are very resistant to any repricing of their existing loans. Mid-sized corporates, SMEs and consumers have limited choice, but they come with higher risk further down the line. Overall, 40 to 60 per cent of the repricing is expected to stick, hence making NIMs to come under pressure.

     

    AMCON levy

    The recent spike in Nigeria Interbank Offered Rate (NIBOR) was, to some extent, caused by uncertainty surrounding the collection of AMCON levies. The AMCON levy, called the sinking fund, is 0.5 per cent of banks’ total assets, which is in line with regulatory requirement setting up the corporation. The fee was increased from initial 0.3 per cent to 0.5 per cent earlier in the year. The AMCON rate hike represents about three to four per cent increase in total operating costs for banks. AMCON debited the banks around 18 September, hence more cash left the coffers of the banks.

    Data obtained from the Financial Market Association of Nigeria (FMAN) showed that as a result of these restrictions, Nigeria Interbank Offered Rate (NIBOR) call (overnight) tenor rose 3,225 basis points to 60 per cent on September 18. The rate was at 44 per cent on 16th September, from 28 per cent the previous day. The NIBOR was at average of 14 per cent before the CRR hike took effect.

    Managing Director, Afrinvest West Africa Plc, Ike Chioke expressed concerns over both policies, saying there will be unavoidable impact’ of the new 50 per cent CRR on majority of the banks going forward.

    The CRR policy, they said, implies significant increase in the banks’ cost of funds, a tensed pressure on the Net Income Margin (NIM) as a larger proportion of the deposits will now be held in CBN’s coffers as reserves.

    He said the affected banks might have to sell down on investment securities to call back the 38 per cent, and also consequently, may re-navigate their deposits mobilisation strategies, re-price risk assets in line with their “cautious” lending strategy and adjust business model.

    Equally to affect banks’ profitability is the implementation of revised guide to bank charges. The CBN said bank customers will from 2016 begin to enjoy free COT on all their transactions. The policy which took effect on April 1, has seen the COT gradually drop to N3 per mille this year. It will be N2 per mille in 2014; N1 per mille in 2015 and zero per cent per mille in 2016.

    Banks have also agreed to put a stop to all charges associated with the use of Automated Teller Machines (ATMs). The agreement was the highpoint of a meeting between the Bankers Committee made up of Chief Executive Officers of Deposit Money Banks, directors and top officials of the CBN and Nigeria Deposit Insurance Corporation (NDIC). Before now, account holders had been made to pay a flat rate of N100 per withdrawal any time they used other banks’ ATMs.

    Although ATM fees were not large, their removal places additional pressure on NIR. Since December 2012, the previous N100 ATM charge has been borne by the customer’s bank. Therefore, as opposed to bank A’s customer paying an ATM fee when she uses bank B’s ATM, it will now fall on Bank A to pay Bank B directly for this service. This favours banks with larger ATM footprints, again Tier 1 (big) banks over Tier 2 (small) peers.

    Chioke said the banking industry is now confronted with the reality of declining fee incomes, mobile money and dollar denominated capital sourcing.

    He predicted that the era of “real banking” appears to be gradually re-emerging as traditional sources of high income/profitability continue to come under threat from increased competition and tighter regulation. According to him, in the next five years, outlook on yields and fee income remains downwards, necessitating the need for banks to focus on lending to the real sector. Also, banks are expected to develop and grow the depth of their core retail banking businesses to retain and amplify cheap deposits.

     

    CBN’s position

    Director of Communication at the CBN, Ugochukwu Okoroafor told The Nation in a phone interview that the regulator is more interested in the overall impact of the policy on the economy than banks’ returns.

    He said: “Banks’ earnings could decline, but we are looking at the overall impact of the regulation on the economy. Remember that banks are just one segment of the economy.” He said the regulator would continue to ensure safety of the financial system.

     

    Shareholders react

    Chairman, Progressive Shareholders Association, Boniface Okezie said contributions to the AMCON levy have become outrageous and eating deeply into banks’ profitability. He advised the banks to always make public, by including in their annual reports, whatever contributions they make to regulators.

    “Investors money can’t be used to fund regulators. This is not acceptable to us, and should be discouraged,” he said. He said that funding of such regulatory bodies should be done by the Federal Government, and not quoted companies, to ensure objectivity and transparency.

    He said banks’ earnings have been badly depleted by the AMCON levy hike. He said he had earlier warned that the CBN is over regulating the sector. “The shareholders are being denied their take home pay. The policy changes are targeted at shareholders,” he said.

    He said many banks now lack the needed fund to lend, which could have helped improve their earnings. Okezie said over regulation will only end up in killing the banking sector and throw more bankers out of job.

    Michael Okafor, a shareholder in one of the banks said feedback from the third quarter results is making many shareholders to have a rethink on investing in banks. He said banks now have to drive low cost funds from Small and Medium Enterprises (SMEs) for them to remain profitable giving the declining margins in government deposits. “It is no longer profitable and wise to keep expensive funds mainly from government. I think forward thinking banks should go for cheaper funds to reduce their cost of funds and create better returns for shareholders,” he said.

  • Economy groans under oil theft

    These are not the best of times for oil companies and the nation. The increasing rate of oil theft is taking its toll on the economy and the companies. Forced shut down of production and declaration of force majeure have been the lot of some oil firms in recent times due to pipeline vandalism by the thieves. The nation, which depends largely on the oil sector, is losing billions of dollars daily. This has led to some firms to divest from onshore to deepwaters. AKINOLA AJIBADE writes on the threats to the economy and the need to halt the illicit trade.

     

     

     

    Crude oil theft, pipeline vandalism, oil shut-ins, divestment from onshore to offshore infrastructure and, sometimes, outright sale of oil production infrastructure. These are some of the now familiar expressions in the oil sector.

    For sometime now, oil majors such as Chevron, Mobil, Total and Shell have been battling the scourge of oil theft while the nation has been losing huge revenue.

    Stakeholders, including the government, oil sector and human right groups, are not happy with the development. They have protested the unwholesome practices, as well as tried to proffer solutions to the problems. But with each passing day, the problems are gaining momentum as no solution seemed to have stemmed the trend.

    Though the Federal Government constituted the Joint Task Force (JTF) to combate the challenge, the success of the military team still leaves much to be desired as oil thieves keep bleeding the economy dry with impunity.

    Not too long ago, the Shell Petroleum Development Company (SPDC) shut down its Trans Niger Pipeline (TNP) because of fresh leaks barely 10 days after it was repaired. The closure, which was the second within two weeks, came with devastating effects on the industry. About 150,000 barrels of crude oil and 500 million cubic feet of gas daily were deferred because of the development.

    Shell’s spokesman, Precious Okolobo, said the company loses an average of 80,000 barrels daily to oil theft. He said the pipelines have been repeatedly targeted and closed down five times since June 2013, due to multiple leaks from illegal points from where thieves siphon crude oil.

    He said the leaks were reported at B-Dere, NowanTai, and Bodo West in Ogoni land, adding that the closure was part of the precautionary measures taken by the company to safeguard its assets.

    Prior to this, Shell had on July 16, this year shut the 24-inch trunk line. The line, which is part of a broader pipeline, route that carries 150,000 barrels of oil daily through the Niger Delta to the Bonny Terminal, was another major blow to the company’s operations. Also, the SPDC suspended loadings at Bonny and Forcados in October last year because of theft, flooding and damage to the supply pipelines. Though Shell lifted the suspension a few days after, it could not compensate for the losses suffered by the company and the economy in particular.

    Industry observers have blamed crude oil theft and associated crimes on militants and the communities where major companies are exploring oil. They said the initial problems Shell and other companies faced were resentment from host communities and its attendant destruction of oil facilities. They said crude oil theft came because the oil majors were not showing enough commitment to tackling ecological problems in the industry.

     

    Fiscal ‘effects’ of crude oil theft

     

    Rising oil theft and pipeline vandalism, volatile oil prices and massive discoveries of shale gas are beginning to impact on Nigeria’s fiscal revenue, as well as making it difficult to meet some of its domestic obligations. An estimated whopping $10billion have been lost to crude oil theft in the last two years. This has adversely affected the sector’s addition to the gross domestic Product (GDP).

    The Minister of Petroleum Resources, Diezani Alison-Madueke said the disruption of exploration in the Niger Delta is posing threat to the growth of the oil industry.

    She said the government is concerned with providing conducive environment for the companies, adding that the industry could only grow when the right environment is put in place.

    She said crude oil theft has resulted in huge loss of revenue for the companies and he government, adding that efforts have been made to arrest the situation.

    A report by Ecobank Group warned that Nigeria’s debts would make the country to remain vulnerable to any unexpected large drop in oil prices. The report also pointed out that Nigeria’s debt would remain susceptible to other macroeconomic shocks, even as it urged the government to properly manage the situation.

    The Ecobank report read: “Nigeria’s debt situation will remain vulnerable to any unexpected large drop in oil prices or other macro-economic shocks to the economy; this could lead to a renewed debt distress.

    “This factor will continue to weigh on the country’s sovereign credit rating. Amid this and other factors, Nigeria’s sovereign foreign currency long-term credit ratings remain below investment grade, albeit with a stable outlook.”

    The report, however, noted that the outlook for Nigeria’s ratings compared more favourably to that of South Africa, which has a negative outlook.

    “Amid growing efforts to reduce external financing risk, the Federal Government’s domestic debt has emerged as the bigger share of total debt, reflecting increased efforts by the Federal Government to finance a larger proportion of its deficit from the domestic capital market rather than from international creditors.

    “The Federal Government’s domestic debt has risen from $10.4 billion (11.7 per cent of GDP) in 2004 to $43.4 billion (16.6 per cent of GDP) in 2012. The stock of domestic debt is likely to remain much higher than external debt, although the government’s recent effort to exercise fiscal prudence should see domestic borrowing fall, remaining well below the Federal Government’s target of 30 per cent of GDP.

    “Already, growth in domestic debt has slowed to 21.7 per cent, down from 40 per cent in 2010. However, despite the downward trajectory in domestic debt, debt-servicing costs remain high (amounting to $4.4 billion; nearly two per cent of GDP in 2012), reducing the fiscal space for investment in otherwise core areas of priority,” it added.

    Also, the Chief Executive Officer, Financial Derivatives Limited, Bismark Rewane, said the country’s economy has been made more vulnerable to macroeconomic shocks by a fall in revenue as a result of crude oil theft in the Niger Delta estimated at 400,000 barrels a day. He said the loss to theft translates to 20 per cent of the country’s output, which amounted to about $14 billion a month.

    “This implies that 20 per cent of Nigeria’s revenue is being lost to crude oil theft. But it does not just stop at that, because the people who are stealing the crude oil have to sell it at a discounted price in the black market, so as long as they do not get full value and it cannot be invested in the national economy, it also amounts to a drop in our Net National Income (NNI),” Rewane said.

    He added that a third danger is that the proceeds from crude oil theft could end up in the hands of Nigeria’s enemies. “It poses a national security risk because the proceeds could be used to buy arms and ammunition by enemies of the state, which could be used to fight and terrorise Nigerians,” he warned.

     

    NEITI’s position

     

    According to the Nigeria Extractive Industry Transparency Initiative (NEITI), oil theft and bunkering constitute a major source of environmental pollution in the Niger Delta region. Its spokesman, Orji said massive public enlightenment and stringent regulations are required to bring national and international attention to the dangers which crude oil theft posed to host communities and the people living along the coastal waters. It said the job of NEITI is more of whistle blowing, adding that it is collaborating with various government agencies on how to tackle oil theft.

    He said: “We believe that environmental hazards arising from oil exploration activities can be checked if relevant agencies such as National Oil Spill Detection and Response Agency (NOSDRA), Ministry of Environment, Department of Petroleum Resources, Ministry of Petroleum Resources and its key parastatals can work together with the security agencies and the companies to enforce the law on environmental pollution.”

    He said rancour among bidders would reduce, when oil licenses are awarded in an open, transparent manner under international best practices.

    NEITI maintains the position that award of oil licenses should be subject to open, transparent and international competitive bid process. This international competitive bid process (ICB) will guarantee that only companies with requisite competencies, professionalism, business integrity and financial capability win OPLs. This would be good for our country in terms of inflow of foreign investments, global competitiveness and good corporate governance which ultimately results in high revenue flows to the federation,’ he added.

    The Petroleum and Gas Senior Staff Association of Nigeria (PENGASSAN) said there are immediate and remote causes of crude oil theft. Its spokesman, Seyi Gambo said the IOCs have lost money to crisis in the Niger Delta, adding that kidnapping of expatriates, pipeline vandalism and crude oil theft are dominant activities in the area.

    He said Shell and other firms have spent huge amount of money in repairing terminals and pipelines, noting that the development has impacted negatively on their operations. Gambo said the terminals always breakdown no sooner had they been fixed.

    He said IOCs are divesting their shares because of high fiscal regime, insecurity of oil and gas installations and unsafe maritime environment.

    From our own pint of view, IOCs have suffered crude oil theft from three angles. The economic effects include reduction in income from sale of oil, running the economy below the fiscal estimate, putting Nigeria in a competitive advantage with other countries, especially those on the continent. He added that there will be increased unemployment, creation of powerful cartels and individuals who can undermine the whole polity such as the Colombian drug cartels. Often times , the cartels stockpile large cache of arms ammunition which they use to terrorise the country. The industry effects are reduction in crude production, lack of new investment by the oil companies operating in Nigeria, increase in oil theft from wells that are not readily taken over by new operators, entrance of new operators especially from China and India, he added.

    The effects on host communities, he said, are reduction in the royalties or other forms of compensation paid to host communities, and lack of social amenities in those communities.

    On labour, Gambo said over 30,000 jobs have been lost to oil theft in the past two years.

    “Job losses as a result of redundancy are one of the problems. Shell, Chevron and Agip are on the part of retrenching their staff. Besides this is the issue of increase in contract/casual form of employment,” he added.

  • Flurry of foreign investments amid security challenges

    Despite the scourge of the dreaded Islamic insurgents, Boko Haram, and general spate of violence, investors have not ceased coming into the country. According to sources, Foreign direct investment (FDI) inflow has remained at between $10 and $12 billion yearly over the last few years. What are the factors responsible for this development? Could it be good returns on investment (RoI)? Has the business environment become more friendly? Could it have been a more liberalised business operating environment?

    OKWY IROEGBU-CHIKEZE provides the anwers.

    In the last two months, Nigeria has signed bilateral trade agreements with many countries, including China, Japan, Austria, Brazil and Mauritius. These deals coming are when the security challenges in the country have assumed a disturbing dimension with the Boko Haram insurgents mindlessly killing people ‘like wanton flies.’

    Again, it is curious because they are coming at a time indigenous manufacturers and investors are groaning under institutional yokes of corruption, incompetent leadership and poor infrastructure to name a few.

    To underscore the level of insecurity in the country, defence got the fattest slice of this year’s budget. Over a whopping N1 trillion was allocated to the sector.

    Yet, the senseless orgy of killings, maiming, kidnap-for-ransom in the Southeast and other criminalities continue to flourish. In the Federal Capital Territory (FCT), between April and September this year, over 150 robbers were reportedly nabbed.

    In Nasarawa and Plateau states, the story is grim. While a a suspected cult group, Ombatse, has been unleashing terror on innocent people in the former, the latter has taken the battle of ethnic cleansing too far.

     

    Reasons for FDI despite challenges

     

    According to stakeholders, there are various reasons for the continued inflow of Foreign Direct Investment (FDI) against all these odds.

    These, they said, include Federal Government’s strategy, availability of cheap labour and high return on investment, among others.

    The government has employed strategies to shore up the capacity of law enforcement agencies for prompt response to security emergencies. This include the implementation of key recommendation in the 2006 Presidential Committee Report on the Reform of Administration of Justice, with regard to the police and prisons. This was targeted at improving the welfare and operational capacities of these law enforcement agencies.

    Again, the government recently, moved to ease the registration of businesses by drastically cutting its cost by half. Minister of Industry, Trade and Investment, Mr Segun Aganga said the rationale behind the reduction in the cost of business registration is in line with the ministry’s investment climate reform programme aimed at strategically repositioning the country as the preferred destination for both local and foreign investments.

    Sector analyst says the action of the government would further trigger the influx of investors into the country.

     

    FDIs

    Recently Nissan and Stallion Group announced plans to jointly build an assembly plant in Nigeria. The investment, many believe, is necessitated by the government’s approval of a new Automobile Industrial Policy.

    Islamic Bank has also indicated its interest to invest $2 billion in the economy while a report released by Derek Scissors of the United States-based Heritage Foundation stated that Chinese investments stood at $15.6 billion spanning many sectors, such as manufacturing, telecommunications, and energy.

    A Japanese firm, Suntory, bought into GlaxoSmithkline with a pricely sum of £1.35 billion, taking over the company’s flag-ship brands, Ribena and Lucozade Boost.

    In addition to these, a leading South African company, Famous Brands, has also acquired 49 per cent stake in UAC Foods while Nestle Plc and Cadbury have indicated interest in investing N100 billion each in upgrading their production facilities in the country.

     

    Stakeholders’ views

     

    The Director-General, Kaduna Chamber of Commerce, Mallam Usman Garba Saulawa, said the coming of foreign investors despite the insecurity should not be a surprise. He said: “Though we have security concerns, it is not limited to Nigeria; therefore, it would likely not deter investors.

    “There are similar issues in Pakistan, India, Indonesia, Brazil and Egypt, but the difference is that those economies are getting a lot of patronage and support from their government and there is sufficient infrastructure. If you look at Indonesia, the government, at a point, made a policy that all civil servants must wear their baltic. This policy helped to boost the production and manufacturing of baltic by the private sector.”

    An analyst Mr. Uche Ukwendu said the nation would have witnessed more FDIs if not for the porous security and the cheapness with which human lives are treated. He recalled that the recent slaughter of over 40 students in a Yobe College of Agriculture by the Boko Haram sect and the number of reported beheadings and slicing of throats in some parts of the North is enough to deter foreign investors. He called for a change of strategies by the security agents to stem the ugly tide.

    He said: “Nigeria’s development plan is simple in theory, yet rather difficult in practice given its poor track record. There are numerous obstacles that collectively deter foreign investment. The nation must address each of these impediments to growth through extensive political and economic reforms. First, there must be a dramatic and comprehensive restructuring of Nigeria’s economy. Currently, petroleum accounts for 95 per cent of Nigeria’s exports. Such a heavy reliance on one mineral makes the nation highly vulnerable to volatile economic fluctuations.”

    To achieve greater macroeconomic stability and diminish its vulnerability to commodity prices, he said the nation must reduce its dependence on oil and natural gas. It would be best for Nigeria to develop and promote its non-energy exports, which include manufacturing, knowledge-based services, and agriculture, he added.

    Uchendu also said the nation’s FDI inflows have been almost exclusively in the natural resources sector, specifically in the oil and natural gas industry which is a suspect. He observed that such concentration of FDIs in one sector limits technology transfer and inhibits job creation. Should Nigeria attract FDIs in other sectors, including manufacturing, tourism, consumer products, and construction, these new FDI projects could generate greater employment and create more balanced economic growth and it is only when this is done that the discerning mind will know that the so called FDI is done in good conscience.

    He warned that the government should not go to sleep because of the FDIs as it may just be cosmetic, adding that the implementation of institutionalised economic reform programmes, such as the National Economic Empowerment and Development Strategy (NEEDS) that has the capacity to move the nation forward.

    NEEDS, he explained, seeks to liberalise the economy, promote private enterprise through increased privatisation and lowering corporate taxes. It also has the capacity to reduce corruption, diversify exports, improve education, develop sound infrastructure, and, ultimately, reduce poverty and increase standards of living.

    The decision to invest in a country has been heavily influenced by the prevailing low wage rate. The rapid growth in FDIs in Nigeria has been attributed primarily to the availability of low cost labour.

    However, when the cost of labour is relatively insignificant (when wage rates vary little from country to country), the skills of the labour force are expected to have an impact on decisions about FDI. Productivity levels in sub-Saharan Africa are lower than in low-income Asian countries and attempt to redress the skill shortage by importing foreign workers is not the solution to a country’s economic woes.

    Head, Southwest Zone, Nigerian Investment Promotion Commission (NIPC), Mr Isaac Idowu, said the nation’s economic blueprint is encapsulated in the Vision 20: 2020. He said though the nation has over $130 billion foreign direct investments, the economy can be said to be under performing at a sub-optimal level because of certain factors.

    Idowu said: “Our strength lies in our predictable investment climate and stable investment while our challenges are in the noticeable widening income gap and wealth distribution, dependence on oil revenue, over-dependence on imports, and huge infrastructure deficit. Others are the endemic corruption, high cost of doing business and insufficient funds for small and medium scale industries.” He assured the Austrian investors on government’s preparedness to allow them own 100 per cent of their enterprise if the line of business is not on the negative list such as military hardware and narcotics.

    On investment opportunities, the NIPC boss added that there was opportunity in the electricity sector with $10 billion projected yearly investment in agriculture and solid minerals.

    An entrepreneur and member of Lagos Chamber of Commerce and Industry (LCCI), Mrs. Olufemi Ilori, expressed her surprise at the influx of trade visits from foreign countries despite the country’s insecurity. She argued that though the world is a global village, the government needs to exercise caution on how wide she opens her borders to ‘portfolio’ investors who may be more interested in buying and selling rather than engaging in enduring investments that will grow the economy.

    Former chairman, Nigeria Economic Summit Group, Mazi Sam Ohabunwa said industrial capacity utilisation has increased from under 43 per cent in the last two years to about 45 per cent. He believed that the apparent challenges in the country has not impacted negatively on FDI, adding that there is increased interest in the nation by investors, which must be sustained.

    An economist, Mr Gabriel Idahosa, said the nation has been hampered by some challenges and that it has only fared well in the telecoms sector.

    He believes that security is an issue as far as foreign direct investment is concerned. Former NBA chairman Business Unit, Mr George Utomi, said the country is not where it should be. He regretted that it has not been able to manage its challenges as good as possible. He said the nation was at par with some countries now known as Asian Tigers some decades ago, but obvious challenges have not allowed it to move beyond forward.

    Director-General, LCCI, Mr Muda Yusuf, said there are positives and negatives in the nation’s economic growth. He said the apparent FDI has not influenced the nation’s poor rating in competitive business rating.

    He tasked the government on the provision of infrastructure, adding that it should implement strong economic policies, and build human capital, and that security and sustainable economic policies could move the nation forward.

    Yusuf said security is a serious issue that must be addressed for the nation to move forward.

    Aganga, during a recent trade investment mission to the United States, said investing in Nigeria could open the African market to the investor, noting that it is a large market with one-billion population. He added that Nigeria had minerals and raw materials to attract diverse type of investments.

    He said: “Nigeria is a large good market with the right demography. And you have access to another one billion people, which is the African market. So, the market is there. When you talk about the raw materials, as a country that is in a top 10 producer of oil and gas, our reserve in terms of gas is about 10 to 11, a country that has at least 44 proven minerals in commercial quantity. Nigeria is also a country that has about 84 million hectares of land where only 40 per cent of that is utilised today and despite that. It is the largest producer of six or seven commodities in the world and second largest producer of another five commodities in the world despite the fact that only 40 per cent of the land is utilised today.”

    On the influx of foreigners to Nigeria under the pretext of investing in the country, Aganga said the Federal Government has discussed the matter with the Chinese government and Chinese investors have promised to develop indigenous skills, instead of bringing all their workforce to Nigeria. He added that the Nigeria Immigration Service would have to apply local laws to control the upsurge of foreigners to the country.

    “We have our local laws and we have our immigration laws in terms of who can come to the country, determined by the sort of skills we are looking for. It is a case of enforcing and applying our local laws. So, any investor, whether he is Chinese, American, European, has to comply with those local laws and if those laws are properly enforced, there would be nothing to worry about. Also, when you look at those big companies operating in Nigeria today, the mentality has shifted from borrowing to investment. Money follows money; nobody is going to invest out of charity because there is money to be made in the country, far much more return on investment.

    “Another thing that has changed is that Nigerian government has made it clear to the Chinese government that it is serious about creating jobs locally. We made it absolutely clear to them that the number of Chinese people coming to the country should never exceed 20 per cent. So it is for us to negotiate and have our discussions with them to make sure that we enforce our local laws,” Aganga added.

    The minister assured that the government would not rest on its oars in providing security, requisite infrastructure and the enabling environment for business to thrive.

  • Associated Aviation plane crash resurrects safety concerns

    Last week’s crash of an Embraer 120 aircraft near the MurtalaMuhammed Airport, Ikeja, Lagos, few minutes after take-off, has once again thrown to the fore, the issue of safety in the nation’s airspace. Over the last 16 months, this crash is the third involving domestic carriers, KELVIN OSA OKUNBOR reports.

     

    For friends and family members of the late former governor of Ondo State, Dr. OlusegunAgagu, these are,indeed, very trying times. Elaborate preparations had been put in place by the government and people of the state he once served meritoriously as its chief executive officer to give him a befitting final journey home.

    Decked in ceremonial dresses, Governor Olusegun Mimiko, members of his cabinet, family members and other distinguished senior citizens of the state had gathered waiting to receive the remains of the scholar-turned politician only to hear that the aircraft bearing his remains had crashed few minutes after take-off with grave fatalities. By the time the thick smoke that enveloped the crashed Associated Aviation Embrear 120 aircraft subsided, over 13 persons were confirmed dead while scores were injured.

    After the spate of air crashes that took the aviation industry by the storm about five years ago abated, the last Dana Air crash and the one that happened last week has once again raised questions about the level of safety in the industry.

    Safety has for long been a subject of public discussion and it will continue to be so for a long time to come.

    Only, a few weeks ago, the Director-General of International Air Transport Association (IATA), Mr Tony Tyler, raised concerns over the poor safety records of airlines in Africa, lamenting that the continent accounts for over 50 per cent of global air accident records.

    According to him, African countries need to raise the regulatory bar to improve air safety as failure to achieve this will confine the continent to the poor safety bracket.

    Some stakeholders are worried that the Nigeria Civil Aviation Authority (NCAA) may not have carried out its statutory oversight duties on the aircraft before it was released for the unfortunate flight.

    They argued that Associated Aviation has not been active in the sector since last year after the June Dana Air crash at Iju- Ishaga, a Lagos suburb.

    Shortly after that air tragedy, the airline (Associated Aviation)allegedly temporarily suspended its operations to overhaul its system.

    The airline, it was gathered, planned to get additional aircraft to boost its fleet, before re-launching its scheduled operations.

    Since then, the airline has been active on its scheduled operations, raising questions over how the NCAA reactivated the Air Operator Certificate (AOC).

    According to the Chief Operations Officer, Associated Aviation, Alhaji TaiwoRaji,  the airline has a fleet of 10 airplanes, six of which are serviceable.  He confirmed that the ill-fated aircraft was 23 years old, adding that the last maintenance on the aircraft was carried out on June 14, this year while it last flew on August 30.

    He said: “Flight 361 departed Lagos en routeAkure when it crashed. Of the 20 passengers that were on board, 13 have been confirmed dead, while there are seven survivors. Of the seven survivors, five of them are at the Lagos State University Teaching Hospital. One of them is at the Nigeria Air Force Hospital while the other survivor is at the Federal Medical Centre at Ebute Meta, (Lagos).”

    He said the airline had informed some victims’ family members, and said it has a valid insurance cover for the aircraft.

    The recent crash has also raised serious questions over the credibility of the re-certification of domestic airlines by NCAA.

    While the owners of the aircraft gave August 30, this year as the last date of flight before the aircraft crashed, the NCAA records gave August 22.

    This contradiction seems to paint the picture of a system that has no proper record keeping tradition.

    At a briefing in Lagos over the  weekend, the Acting Director-General of  NCAA , AlhajiAbdullahi  Adamu, said  the crashed plane was a 30-seater aircraft manufactured by Embraer S. A Brazil and registered in Nigeria on May 22, 2007.

    He said: “The airline holds a subsisting air operators certificate and conducts only charter operations. The aircraft had a certificate of airworthiness (valid) till October 22, 2013. Our records show that the airline has an insurance policy valid until June 14, 2014.

    “Before the ill- fated flight, the airline last operated the EMB 120 Extended Range aircraft with registration number 5N- BJY aircraft in a charter flight on August 22, 2013. The aircraft was certified fit for flight by Ibie of the airline’s aircraft maintenance engineers prior to departure, who was also on board the ill-fated flight.

    “The AIB (Accident Investigation Bureau) has since launched an investigation into the cause of the crash; we await the report of the investigation.”

    But experts are worried that the NCAA may not have given all the information at its disposal concerning the flight and other details about the crew.

    Rather than opening up, the regulatory body urged people seeking information about the aircraft and the accident to liaise with the AIB.

    Speaking on the accident, an aircraft engineer, Sheri Kyari, cautioned players to refrain from making rash comments that could jeopardise the probe.

    He said it was wrong for people to say that the airspace is not safe because of the mishap, adding that since the black box has been recovered, the AIB would be able to decode the cockpit voice recorder and flight data recorder to unravel the cause of the crash in its preliminary investigations.

    Kyari further affirmed that Nigeria should be isolated from the poor safety records associated with the continent, attributing the poor safety records in Africa to airworthiness and penchant for cutting corners by some operators.

    He said as much as routine maintenance is carried out on an aircraft, it is safe to operate, regardless of its age.

    He urged operators to carry out regular storage maintenance of the aircraft, when it has not flown for sometime.

    He said: “You have to carry out routine inspections to ensure that some components of the aircraft have not expired. This also involves storage maintenance of the aircraft. Even when the aircraft is not flying, regular maintenance must be carried out to ensure complete airworthiness.”

    A former pilot with the defunct Nigeria Airways, who spoke on condition of anonymity, said it is too early to guess the cause of the crash.

    He said it is wrong to link the age of the aircraft with the accident as studies have shown that age has nothing to do with the safety of an aircraft.

    He urged relevant aviation authorities to expedite action on the investigations into the crash, adding that the government should not be in a hurry to take any decision that could affect the survival of airlines.

    On insinuation that the aircraft lost an engine shortly after take-off, he said it was not true because the pilot would have noticed that before take-off and aborted the flight. “The pilot would have noticed this at the point of take off, and all he needed to do was to have aborted the take off. This is easier to do at the point of take off,” he said.

    Experts have urged the government to beam its searchlight on charter operations of airlines. They said their operations should also be subjected to scrutiny just as it is done for scheduled operations.

    They insisted that the NCAA should immediately conclude its technical audit of domestic airlines to enable it to clean up the system.

    They called for the overhaul of the technical units in the regulatory body to enable it to engage the right professionals in departments, such as airworthiness, standards and licensing inspectorate.

    A few months ago, some stakeholders raised questions about the rationale for the issuance of AOC to some airlines when NCAA did not have a substantive director- general.

    But the Director of Airworthiness and Standards, Benedict Adeyileka, faulted such claims, insisting that NCAA adhered to industry standards in the matter.

    The NCAA has insisted on adhering to high safety standard in the sector irrespective of the situation on ground.

    The authority also laid to rest the condemnation of some controversial AOCs it issued to some new airlines during the period it had no substantive director-general.

    Adeyileka said aside the fact that all the AOCs issued during the period in question met all the required safety standards and regulations, the absence of a substantive Director-General for about three months does not mean that activities should be grounded.

    Adeyileka said:  ”The different offices in NCAA will continue to function even in the absence of their directors. For instance, if the Director of Licensing is on holiday, does it mean we should shut the office and no licence would be issued until he comes back? Is that what we are asking for?

    “The functions of Director-General, NCAA will continue to run with a substantive DG or with an Acting DG. Is it proper to shut the office because a new DG has not resumed? We should be constructive and we don’t run aviation in such a manner. Do you think it is proper to stop all activities of the authority because a new DG has not resumed?

    “Do you think you are being fair to those people who have spent time and lots of money? Everybody is talking about 50 hours of demonstration flights; you can do more or even less, depending on how you are able to convince the authority that you can carry out safety operations at all times. The 50 hours of demonstration flight does not give you the assurance of an AOC.”

    The President of Aviation Round Table (ART), Captain Dele Ore and the Assistant Secretary, Airline Operators of Nigeria (AON), Alhaji Mohammed Tukur, and some key players in the sector had alleged that all the AOCs issued by the then Acting Director-General of the regulatory body, Mr Joyce Nkemakolam did not meet the safety standards.

    Ore and the others argued that the new AOCs did not meet the required safety standards as set by the International Civil Aviation Organisation (ICAO) and NCAA. They warned the public against patronising such airlines.

    They tasked the Ministry of Aviation to direct the new Director-General, Captain FolayeleAkinkuotu, to do recertification, maintaining that any attempt to ignore this call might jeopardise the safety of the traveling public.

    A few months ago, Akinkuotu said the authority was carrying out technical and safety audit of airlines to ascertain their state of health.

    He said there would be changes in the sector as the NCAA will not allow violation of civil aviation regulations.

    According to him, his immediate priorities will be to cause radical change in the regulation of civil aviation in the country, adding that only radical changes in the way civil aviation is carried out would bring about sustainable progress for the industry. He said the goal of safety and security for air travel will be pursued vigorously to whip operators in line.

    He announced the introduction of a new directorate that would cater for the needs of corporate, charter, private jets as well as helicopters that is steadily growing in the industry.

    The DG said the directorate has become imperative in view of the safety and compliance issues arising from that arm of the industry, requiring radical steps to move the industry forward.

    He called for stakeholders’ input to move the industry forward affirming that the radical change that will be implemented in the sector may brew enmity by operators who are not taking issues of compliance seriously.

    IATA had stated that African Airlines recorded one accident for every 270,000 flights last year while the industry average was one accident for about five million flights.

    An aircraft engineer, Ajayi Adigun, agrees with IATA. He said scheduled flights are safer in developed world, adding that the airspace is still unsafe in Africa. He said over the years, progress had been made in Crew Resource Management (CRM) in the developed countries.

    Adigun explained that pilot error comes later in after something might have gone wrong with the airplane itself, adding that 12 per cent of major aircraft disasters involving Boeing aircraft were attributive to maintenance and inspection errors.

    He said: “Maintaining aircraft is a complex and demanding endeavour. It consists of numerous inter-related human and machine components. The complexity of such interface means that errors are likely to be introduced and ways to detect errors and deal with them are needed. The safety of the flying public is first and foremost dependent on the proper functioning of the aircraft and its components.

    “In any maintenance process, it is the ability of the maintenance personnel to work together that determines its success. The very nature of the industry is such that engineers and mechanics will often need to work together; therefore communication and team working skills are important.

    “Indeed, maintenance plays such a crucial role in flight safety that it is the responsibility of the aircraft owner or operators to ensure that they are properly maintained. In pursuance of the above, the Federal Aviation Administration (FAA) of the United States issued Advisory Circular 120-72, Maintenance Resource Management (MRM) Training in Sept 2000 and more recently an MRM Results Evaluation Calculator.”

    Adigun added that just like CMR, MRM emphasises a team approach to human error reduction using principles that seek to improve communications, situational awareness, problem solving, decision making and team work are crucial elements in ensuring safety.

    The consensus among experts is that more are still needed to be done to keep airspace safe for both domestic and international flight operations.

     

  • The changing face of insurance

    • Insurers in race for survival

    It has been a year like no other for the insurance industry. It has been rules, rules and rules. To the National Insurance Commission (NAICOM), the rules will positively impact on the fortunes of the industry, but operators fear that they will create uncertainty. the reality is that many of the operators are struggling to survive. OMOBOLA TOLU-KUSIMO reports that only the strongest will emerge by the end of this year.

     

    FOR insurers, it has been a year of strict rules. The National Insurance Commission (NAICOM) introduced these rules to make insurance firms sit up: The rules may have become imperative because of the challenges faced by the firms, many of which are struggling to survive.

    Towards this end, NAICOM strengthened its supervisory and enforcement rules by ensuring that financial information, such as returns and solvency are accurate.

    NAICOM also strengthened its supervision of insurance and reinsurance companies and brokers. It also moved to tackle money laundering and the financing of terrorism, among others.

    It mandated the adoption of International Financial Reporting Standard (IFRS) from last year; and set up the oil and gas policy guidelines.

    But the major challenge of insurers is the very low level of penetration and patronage in the country.

    Following the recapitalisation of the industry in 2007, insurance premium income, which represents about one per cent of the country’s gross domestic product (GDP), has grown from N105 billion in 2007 to N300 billion this year.

    The industry total assets have risen steadily to N635 billion while the number of operators in the sector has similarly increased remarkably over the period. The sector now has 2,250 insurance agents, 579 insurance brokers, 66 loss adjusters, 57 insurance companies, and reinsurance companies.

    Other developments that have taken place and include the enforcement of compliance with compulsory insurance in line with the Insurance Act 2003, the sanitisation and modernisation of insurance agency system, wiping out of fake insurance institutions, and introduction of risk-based supervision of institutions under the Commission.

    To facilitate financial inclusion, NAICOM created avenues for micro-insurance, agricultural insurance and Takaful insurance (an Islamic insurance policy) to evolve. The establishment of a complaint bureau by the commission is with the primary objective of addressing genuine complaints from customers.

    A code of corporate governance was also put in place to strengthen governance in the companies.

    The commission also embarked on public enlightenment campaign to educate the public on insurance. It strengthened its relationship with other regulators, both within and outside the country through the signing of Memorandum of Uunderstanding (MoU) and enhanced collaboration in pursuing mutually beneficial interests.

    According to NAICOM, these initiatives aligned with the strategic objectives to be achieved by the sector as articulated in Vision 20:2020.

    The objectives are to ensure insurance credibility and protect policy holders; embark on risk-based capitalisation of insurance companies; embed the governance and risk management framework for the insurance companies and to diversify and integrate insurance products into financial services for long term financing.

    To achieve these objectives it was envisaged that there would be increased financial literacy and awareness, human capital development and attraction of expertise, integrated and linked Information Technology (IT) systems, improved legal and regulatory framework.

    Director of Inspectorate, NAICOM, Mr Barineka Thompson said insurance regulators have done well in the past decades, adding that the regulators recognised that operators should not be strangulated with too many rules, but must be determined to do everything to protect the rights of policyholders.

    He said: “The commission believes that regulators should not over regulate but there should be proportionate regulation, so companies do not go out of circulation.

    “Primarily, the role of the regulator is to preserve the interest of the insured. The fallout of the recent economic meltdown across the globe justified the conservatism of insurance regulators and operators. We tightened the knots and not a laissez faire attitude.”

    He further said that regulatory agenda and renewed need for increased growth, cost reductions, profitability and return on capital remained central themes for insurers and practitioners.

    He noted that being able to respond appropriately to the challenges in the industry would mark out the successful insurers in this new era.

    It will also define in the next few years, the direction of the industry and mark it out as another period to rise to the challenge, he said.

    Director-General, Nigeria Insurers Association of Nigeria, Mr Thomas Sunday said the benefits of the economy would only serve sector and enhance its ability to realise its potential when discipline and high ethical standard is given a priority.

    He urged operators to uphold ethical standards to get public confidence needed to boost the sector.

    He said insurers must comply with the code of conduct of the profession and other relevant laws and regulations, adding that they must also act with the highest ethical standards and integrity.

    “Insurance operators must act in the best interest of their clients and provide a high standard of service while treating the insuring public fairly. The benefits of ethical conduct will make the industry to become more attractive to investors while corporate risk exposure will be reduced.”

    Stating the characteristics of insurance, he explained that insurance is a means of financial intermediation.

    “Its operations involve exchange of things of unequal value and the article traded is a promise. Assets are held in trust while the supply chain involves people of various interests which at times could be conflicting,” he added.

    But the President of the Chartered Insurance Institute of Nigeria (CIIN), Mr Fatai Lawal, differs. According to him, the review of regulatory and operational guidelines in response to the volatile environment will not help the growth of the industry

    He lamented that operators are also under the pressure of business owners to deliver huge returns on their investment, an uphill task for any manager who must not cut corners or compromise professional event.

    An expert, Mr Muftau Oyegunle said accepting that shaping the future of the industry lies with every one would make a difference.

    Ostensibly referring to the avalanche of regulations, he said: “However, unacceptable things may be (with the industry) today, making conscious efforts to improve on the spot we are privileged to occupy at the moment in the industry, is the panacea for a better tomorrow.

    “The insurance landscape is constantly in flux and the forces shaping the industry in the next five years will differ from those that shaped it over the past few years.”

    He identified forces that would challenge the strategies of insurance carriers in the country.

    “These forces are shifts in growth from mature to emerging markets, increases in the development and consumption of technology; an escalation of both risk and regulation; changes in consumer behaviour; and in the competitive landscape. These will create a sea of challenges in which today’s high performers and those that are aspiring to be high performers in the future will need to navigate.

    “For our economic survival and that of our companies, we need to collaborate technologically to move the industry forward. The foreign companies are gradually positioning themselves for the mass products and it will be unfortunate if the companies lose out. Although these forces might not be new, what is new is their intensity and the speed at which they will take effect.”

    He also said the critical factors that will shape the future of the industry are technology, innovation; know-how, collaboration and service delivery.

    He noted that the availability of credit to individuals and business organisations with ease and low interest rate is necessary to accelerate economic growth, particularly the mortgage industry. Accurate population census and national identity card are factors while the review of the Land Use decree will also be an enabler, he added.

    According to him, the impact of the ‘No Premium No Cover’ enforcement is an example of what legislation can do to the industry as most underwriters have reported better cash flow position.

    The questions are: What happens if the Third Party Insurance Act is enforced? Can the Federal Government become a disciplined buyer and state and local governments partner with the industry on specific products?

    Micro insurance, health insurance, agricultural insurance and other products that would benefit the masses would require government’s critical support for success, he added.

     

  • A teenager’s daring air ride

    His action beat every stretch of imagination! On August 24, 13-year-old Daniel Ohikhena found his way into the tyre hold of an airplane at the Benin Airport. He hid in that compartment until the Arik Air Plane got to the Murtala Muhammed Airport in Ikeja, Lagos. How did he beat security checks to hide in the tyre compartment of all places? Did he know the implication of his action? Daniel has since been released to the Edo State government by the State Security Service (SSS) which kept him for days. What did the SSS find out from him? KELVIN OSA OKUNBOR reports

     

     

     

    The aviation sector is once again in the eyes of the storm over the stowaway story of a teenage boy who beat security checks at the Benin Airport to get into the tyre compartment of an aircraft belonging to Arik Air that landed at the Murtala Muhammed Airport, Ikeja, Lagos.

    Like a movie with an intriguing plot, the circumstances leading to how the boy got into the aircraft tyres before it landed in Lagos are still unfolding.

    Allegation of dereliction of duty is being levelled on Arik Air and the Federal Airports Authority of Nigeria (FAAN). Director-General, Nigeria Civil Aviation Authority (NCAA),Captain Folayele Akinkuotu said the regulator is investigating the circumstances that may have led to the incident, promising to sanction any party found wanting in the incident.

    Master Daniel Oikhena was released last Tuesday after he spent 11 days with operatives of the State Security Services (SSS), apparently answering questions on how he got into the tyre compartment of Arik Air aircraft as a stowaway from Benin Airport.

    Though he has been released to officials of the Edo State Ministry of Women Affairs and Social Development to undergo another round of questions at a correctional facility, the effect of his adventure flight in the tyre compartment of the aircraft still remains a huge puzzle to watchers and players of the sector.

    As the industry was coming to terms with the adventure of Daniel, another resident around the Benin Airport, Mr Leroy Ugaga, 25, was arrested last Monday for runway incursion at same Benin Airport.

    The man described as a trespasser, according to FAAN, was trying to gain entry to the airside, before he was arrested.

    Aviation experts say the incident has exposed the industry where issues of security and safety at airports has polarised the sector.

    Questions are being raised as to how the teenager found his way into the tyre compartment.

    Could there be insider threat or abuse? Was there any security lapse at the Benin Airport? Could the infraction have occurred because of lack of perimeter fencing at the airport?

    These are some of the questions the tripartite investigation being carried out by FAAN, NCAA and the SSS would answer in the days ahead.

    Some experts in the sector have raised concerns over the failure of the pilot to abort the flight after some passengers observed that they saw a boy around the aircraft when it was set to take off at the runway.

    An aviation security expert, Group Captain John Ojikutu (Rtd), said the pilot ought to have aborted the flight and get airport security personnel to double check the aircraft before finally embarking on the trip.

    Ojikutu said: “What happened in Benin Airport, you need to find out the security programme of the aerodrome. Every airport and airline that operate there ought to have a security programme in place.

    “What is the status of the airport access control? What is the status of the airport perimeter fence for a teenager to pass through access control to enter the airport and enter the aircraft?

    According to him, there is need to take a second look at the security programme and that of the airlines operating from the airport.

    “The airline has a security programme in place. A passenger observed that he saw somebody under the aircraft. What was reasonable for the pilot to have done according to regulation, was for the pilot to abort take off.

    “It was for the pilot to turn the aircraft back, do an inspection on the aircraft, ask all passengers to disembark, do a proper check, search the aircraft to ensure there was nothing before allowing the aircraft to take off.

    “What is FAAN’s security programme for access control and perimeter fencing? I have said one thing clearly and it is that there is no airport in this country that has a security fence. What we have is a perimeter fence which is only complying with Annex 14 of International Civil Aviation Organisation (ICAO). It is not aviation security. For you to comply with Annex 17, is for the airport authority to have a security fence,” he said.

    The retired Airforce chief said the best that could be done with the perimeter fence is to enhance it with adequate security measures for it to be Annex 14-compliant, lamenting that the MMIA does not have a security fence. No airport in this country has a security fence, the best they have is a perimeter fence, he added.

    “I have been telling them since 2006 that we do not have a security fence around the airports. What we have is mere perimeter fence and the government is building terminal buildings around the whole place.

    “So, we need a security fence. Everything borders on access control and perimeter fence. There is no control. ICAO prescribes that you must provide six metres control from the fence, this does not exist in Nigeria.

    “The security arrangement in Nigeria as it affects airport perimeter fence does not meet the requirements if Annex 17 of ICAO on security, not a single airport,” he said.

    He said further FAAN was complying with Annex 14 of ICAO, which does not cover airport security, stressing that it only tells the boundary of the land area. “You must comply with Annex 17, which is security. If you do not have sufficient land to do it, you must be able to control the other side of your airport perimeter fence, which must be six metres away from the fence from outside.

    “In Nigeria we cannot control it because people have built on the other side. So, we are not complying with Annex 17. This problem now is the problem of NCAA, it should go and investigate in Benin, the nature of the perimeter fence, the nature of the access control,” he added.

    According to him, NCAA should look at the airport security arrangement, once it discovers any deficiency, it should do an audit or a survey of the airport and act on its findings.

    “NCAA needs to do that very quickly. It needs nobody to tell it, especially under the condition we are with the obvious security challenges including Boko Haram.

    “But they are not doing that, yet the agencies are making noise. If there is any breach of the security programme, there should be sanctions,” he insisted.

    An industry analyst, Olu Unhunayo said: “This is not the time to trade blame, what if the boy was carrying a bomb? Please we should put heads together on how to solve this matter. FAAN and the airline are to be blamed. There is no perimeter fence at our airports, all the airports must be fenced to keep people or animals from straying into the airport environment especially the runway.”

    Speaking through its Media Officer, Mr Banji Ola, Arik Air, said: “The pilot of Arik Air flight W3 544, departing Benin Airport for Lagos at 9.00am today August 24, 2013 reported to the control tower the presence of a strange boy in the bush about 200 – 300 meters at the end of Runway 23.

    “Officials at the Control Tower told the captain that they were sending security men to the place to arrest the boy. As the captain was making his final turn, preparatory for take-off, a cabin crew called his attention to the information by some of the passengers that they saw a boy running towards the airplane. The First Officer confirmed that they had observed it earlier and alerted the control tower which responded that they have sent the patrol team to arrest the boy.

    “The captain again reported to the control tower and was informed that the situation was under control and that he had been cleared for take-off. On arrival at the domestic wing of MMA, Lagos, a teenage boy, who apparently had sneaked into the aircraft main wheel well jumped out and was arrested by Arik personnel and handed over to FAAN security.”

    The management of the airline expressed shock over the incident wondering how the teenager beat the aviation security personnel at the Benin Airport to get to the runway.

    Arik Air’s Managing Director Mr Chris Ndulue said: “We are worried by the incessant security lapses at our airports. We are appealing to the management of FAAN to immediately address the problem.”

    Reacting to the indictment by Arik Air, FAAN’s General Manager, Mr Yakubu Dati said it is regrettable that the airline is holding the airport authority liable for the infraction.

    He explained that Arik Air acted with impunity, by not stopping the aircraft to check when the crew and ground personnel ‘s attention was drawn to an abnormality on the Tarmac.

    According to Dati, the procedure for such infraction is for the crew to abort the flight and return to the apron for check-up. “It is revealing that Arik Air accepted that their attention was drawn to the presence of foreign bodies on the tarmac. Why they ignored this vital safety precaution reveals their disdain for following safety procedures,” he said.

    He blamed the airline for the problem, warning that the airport authority will not tolerate such infraction from any operator.

    He said: “This is an arrant display of impunity. The aircraft should not have taxied further, but return to the apron until a proper check is carried out on all parts of the aircraft.

    “FAAN will not tolerate such impunity henceforth from Arik or any airline. Any violation would be met with applicable sanctions.

    “The facts of the matter as FAAN’s investigation has revealed, are completely different to the Arik account.Our investigations reveal that a passenger on board the flight called the attention of the cabin crew while the aircraft was waiting to take off at the threshold of the runway, to the effect that they had seen a young boy walk under the aircraft and had not seen him reappear either side.

    “The cabin crew in turn informed the pilots in the cockpit about this. The pilots called the control tower and asked them to request FAAN to do a sweep of the area after their departure, opting to carry on with their flight despite the report.

    “Immediately upon the departure of the aircraft, FAAN’s security did another sweep of the area and found nothing unusual. Upon the arrival of the aircraft in Lagos, we were informed that there had been a stowaway found alive alighting from the wheel well of the aircraft,” he said.

    According to him, given that security is a responsibility for all players in the industry, a critical last opportunity to detect and prevent this stowaway was offered and had the airline taken the information by passengers as seriously as they should have, this incident would have been avoided.

    He said FAAN was dealing with a number of legacy problems stemming from neglect over the years. “One of these is the perimeter fencing of airports across the country, which either did not exist before or have deteriorated significantly. A decision was made by this administration to prioritise the perimeter fencing of every FAAN airport. This is a major undertaking and we are following an aggressive program to achieve this at all its 22 airports,” Dati said.

    He said as a result of the incident, FAAN has further tightened risk amelioration procedure to ensure that a similar incident does not occur.

    He said since 2011, the fencing of major airports across the country has started with some level of completion in Abuja, Port Harcourt, Kano and Lagos.

    Dati said the fencing of other airports is in line with the infrastructure upgrade of the airports, but that the project was delayed because of inadequate funds.

    He said the government is considering fast-tracking of funding to see the airport perimeter fencing through.

    Dati said: “We have already started the perimeter fencing of all airports in the country in terms of planning. But, we are doing in phases, sector by sector. It is part of of the strategy of the airport security master plan. The delay in the project is due to the myriad of challenges the sector is going through.

    “The remodelling of the airports has attained up to 90 per cent with the installation of safety and security equipment are completed.

    “The fencing of the major airports are on going, because of the importance we attach to safety. We have also strengthened our procedure for safety by improving on ramp inspection of the tarmac through the synergy we have with other security agencies.

    “But, the major challenge we have now is inadequate funding and the procedure for getting approval.

    “Security remains on the front burner to ensure we meet the requirement for airport certification,” he said.

    He continued: “We have sent our security officials to carry out investigations about the circumstances that led to the incident in Benin Airport.

    “Anybody found guilty will receive appropriate sanctions. Government will execute appropriate sanctions, wherever the leakage is we are going to look at it. The teenager did not beat our security. It is just that the airline pilot was not patient to have gone back for another check. The teenager was detected, the pilot did not do back to go for review,” he said.

    An aviation industry union leader, Comrade Benjamin Okewu, said the airlines, FAAN, and all the security agencies must work together, to nip in the bud any security breach and there must be 24-hour patrol around the perimeter fence of the airport.

    FAAN said it has taken additional security measures to forestall runway incursions at all the airports, especially those without perimeter fences. This is in response to the recent stowaway incident that occurred at the Benin Airport on August 24, 2013.

    First, at every airport without fully functional perimeter fence, a FAAN security vehicle will be deployed to a point within full view of the aircraft as it taxies out to take off and maintain visual scrutiny and if necessary to respond to any situation until every departing aircraft is safely airborne.

    Secondly, bushes at all airports are to be cleared to ensure full view of the perimeter, to allow both the control tower, FAAN Fire and Rescue observation posts and aviation security patrol teams have a sweeping view of the perimeter of an airport from their duty posts.

    Again, static observation posts will be erected at strategic locations within the perimeter fence of the airports to forestall premeditated and inadvertent unauthorised access to the airside. This will be complemented by motorised and foot patrols.

    FAAN lamented that the absence of perimeter fences at most of the airports poses a challenge to it because of the huge capital required in their construction, adding that some of them are as long as 40 kilometres.

     

  • Are port charges high? Importers: yes; Shippers: no

    Over 65 per cent of the imports into West Africa are consumed in Nigeria. Investigation shows that less than 30 per cent of these imports come in through the seaports, raising questions on why goods destined for the country are diverted to neighbouring countries. Stakeholders blame terminal operators and shipping companies for the problem, which they link to imposition of arbitrary charge. OLUWAKEMI DAUDA reports.

     

     

    Terminal operators and shipping firms operating at the ports are making a kill through what many described as unethical business practice. They milk importers through rates disguised as demurrage and storage charges. The affected importers and clearing agents are seeking the government’s intervention to address the problem.

    Stakeholders told The Nation that the exorbitant charges have led to diversion of cargoes coming to the country to the neighbouring Republic of Benin and Togo. The development, they said, also encourage massive smuggling across the borders.

    Among the contentious issues raised are the length of time it takes to clear goods at the ports, the man-hour lost, or time required to position containers for Customs examination.

    The Managing Director, Bolas Shipping Limited Mr Yemi Ibikunle decried the number of days it takes terminal operators to position containers for Customs examination and called on the government to address the challenge.

    The issue, he said, was strong enough to require the Presidency’s intervention.He appealed to President Goodluck Jonathan and the Minister of Finance, Dr Ngozi Okonjo-Iweala, to solve the problem. He urged the government to take urgent action to achieve the 48-hour cargo clearance policy. Importers, he said, could not continue to be at the mercy of terminal operators.

    “Despite obvious limitations, the Federal Government must strive to infuse competition and transparency in the management of national resources so that optimal value would be earned for the maximum benefits of Nigerians. Ensuring that strategic institutions like the Customs are operational and efficient, is therefore, very essential for the government,” he said.

     

    Factors working against the ports

    There are several factors working against the ports. They include the cumbersome process of goods delivery, congestion and imposition of arbitrary charges on imported goods, among others.

    Most of the goods such as rice, frozen foods, fruits, sweet, milk, cigarretes and other items, such as used vehicles and furniture, are routed through the jungles around Seme and Idi-Iroko borders .

    An importer and maritime lawyer, Rotimi Salako, said shipping lines, terminal operators and off-dock terminals, have jacked up their prices, while demurrage on containers have tripled far beyond what was charged before the concession.

    He said for a 20-foot container, shipping companies charge N5,000 for document release, container cleaning N3,000, shipping line charges N28,000, telex release N5,000, amendment charges, N15,000, as well as five per cent Value Added Tax (VAT) of the total charge.

    He listed other charges to include N580 for the Nigeria Ports Authority (NPA) as Maritime Organisation of West and Central Africa (MOWCA) levy and demurrage on containers that were not returned on time, adding that terminal operators collect N3, 500 delivery charges, N25, 000 terminal handling charges, N400 vehicle entry permit, N2, 500 to position containers for examination, and N1, 500 storage, or rent charge for the first three days and N3, 500 after 24 days.

    For the off-dock terminal, according to him, they collect N20,000 as transfer charge, N2,000 as release and documentation, N5,000 as royalty to terminal operators, N2,500 to position containers for customs examination, N3,500 as labour charges for examination, including N1,250 as terminal delivery charge and N400 for vehicle entry permit. Before the concessioning, the importers said the charges were N1, 204 as wharf age and N1, 294 for documentation and release, terminal delivery order including vehicle entry permit, stressing that importers also pay five per cent VAT of the total charges.

    The NPA also charges N375 as demurrage after three days grace period and N750 for 40-foot, no matter the number of days. Apart from the charges, which importers pay to the shipping lines, terminal operators and bonded terminal operators, they also pay to the Customs seven per cent port levy, five per cent Value Added Tax, Negotiable Duty Credit Certificate, 0.5 per cent ECOWAS Trade Liberalisation Scheme, one per cent Comprehensive Import Supervision Scheme, 20 per cent rice levy and 10 per cent duty, including 10 per cent textile levy as well as 30 per cent surety and other levies.

     

    Nigeria’s port tariff highest

    The country operates one of the highest port tariff structure in the West and Central African sub-region and most of which are imposed by the terminal operators, shipping companies, government and its agencies at the ports.

    Investigation revealed that the cost of shipping and clearing of cargoes at the nation’s seaports is 10 times higher than any other port within the West African sub-region. For example, apart from the statutory charges such as the Import Duty, Fees, Common External Tariff Levy and the Value Added Tax, which are paid into the Federation Account of the government, importers are also made to pay a myriads of charges under different sub-heads, which include the seven per cent Port Levy, 0.5 per cent Economic Community of West African States (ECOWAS) Trade Liberalisation Scheme (ETLS), which is also paid in other jurisdictions within the community, one per cent Comprehensive Import Supervision Scheme, which is the Free On Board value of imports, from which the service providers under the Destination Inspection Scheme are paid and the Rice levy.

    Others include, the Cigarette Levy, National Automotive Council Levy, Port Development Levy, Sugar Levy, Port Surcharge and sundry charges paid to the government before the imported consignment would be allowed to leave the port. In addition to these, government agencies that take part in cargo inspection such as the Customs, NPA, Standards Organisation of Nigeria (SON) and National Agency for Food, Drug Administration and Control, among others impose one levy or the other.

     

    Double taxation

    Findings also show that before an imported vehicle or container is allowed to exit the gate of any Lagos ports, for instance, importers or their clearing agents pay between N10,000 and N40,000 to security officials.

    These charges, stakeholders said, have made the seaports unattractive and uncompetitive for business in the sub-region.

    The President of the National Association of Government Approved Freight Forwarders, Mr Eugene Nweke, said whatever the government generates through the Cigarette Levy, National Automotive Council Levy, Port Development Levy, Sugar Levy, Port Surcharge that it loses more as a result of cargo diversion.He decried the payment of VAT on imported goods, adding that it is double taxation. He argued that most of these imported goods are subjected to another round of VAT collection at the final sales point, noting that this is double taxation.

    “The government should determine at what point an importer or freight forwarder should pay VAT on a consignment so that he goes ahead and pays and obtains an official receipt, which he would use for the entire clearing process for the consignment,” he said.

    President of Council of Managing Directors of Licensed Customs Agents (CMDLCA), Mr Lucky Amiwero and other stakeholders, said the multiple tariffs collected by government agencies have become an albatross in the Federal Government’s drive to make Nigeria the maritime hub in the West Africa sub-region.

    He warned that the country might lose substantial volume of West African cargo traffic, which she controls, a development that will portend danger for her economy.

    “The government is aware that Ghana and Cote’d Ivoire are building millennium port facilities that would berth mega ships of over 10, 000 TEUs of cargo capacity.

    “Very soon, Nigerian importers may have to use smaller ships to take their cargo from these two seaports if measures were not taken to address these inadequacies now,” he warned.

    According to him, importers and clearing agents have over the years cried out to no avail and many of them have resigned to fate while many others have decided to bring in their consignments through neighbouring African seaports.

    The National President, Association of Nigerian Licensed Customs Agents (ANALCA), Alhaji Olayiwola Shittu said the greatest challenges facing maritime transport are multiple taxation and unnecessary charges by terminal operators, shipping companies and service providers which are not commensurate with the services rendered by them. Importers and clearing agents, the ANLCA chief said, pay huge amount at different points in the ports before their goods are cleared. The shipping companies, Shittu said, also force agents and importers to pay deposit for containers loaded by trucks.

    He alleged that in most cases the terminal operators look for excuses so that the money would not be refunded after the agents have returned the containers.

    Shittu said: ”Normally, the tax on imported goods is five per cent, but an importer would be wasting his time to think that is the only tax to be paid. There are several other government charges that make the tax to go up to as high as 15 per cent. For example, after paying the five per cent, you will still have to pay a sub-charge, which is seven per cent; this is called development charge.

    “The service provider put in place to ensure that proper documentations are made to meet some certain standards, are paid one per cent.

    ”The increase in the money for clearing goods in the ports will continue to escalate as long as terminal operators are charging whatever they want, and as long as the security agents are there to extort money. If your goods are put on a wooden panel for off-loading or up-holding, plank guarantors will tell you that that particular goods abroad was not registered. So, the owner should pay a particular amount in their office or find something for ‘the boys’.”

     

    Parity with other ports

    Importers said the review would eliminate arbitrariness and ensure parity with other ports, particularly those of neighbouring countries.

    Speaking on behalf of other importers in Lagos last week, the Managing Director, Sea Investment Mr Richard Ogoegbunam said port tariff must be competitive and be commensurate with services rendered by the terminal operators. To reduce the cost of doing business in the ports, he said the Shippers’ Council had abolished service charges, bank charge, commission on turnover and concessionaires service charge.

    Ogoegbunam praised the council for abolishing port administrative and sorting charges. He said the council had been implementing the Inland Container Depots (ICDs) project on Build, Own, Operate and Transfer (BOOT) basis to bring shipping services to the door steps of shippers.

    He said the ICDs would also assist in decongesting the seaports and make them more user-friendly. He criticised Customs bureaucracy at the ports, saying the bureaucracy they imposed by Customs on containers and Roll on/Roll off (RORO) vessels by customs procedures were a challenge to ports operations.

     

    Shippers’ Council to probe ‘exploitation’

    TheNigeria Shippers’ Council (NSC) has pledged to investigate complaints of alleged exploitation against ports terminal operators by clearing agents, importers and other stakeholders.

    Established in 1978, NSC is empowered with protecting the interest of shippers.

    According to NSC, complaints against private terminal operators increased from 63 in 2011 to 117 last year. A senior NSC official who spoke on condition of anonymity said most of the complaints were on excessive storage and demurrage charges by terminal operators and shipping lines.

    Other complaints, according to the official, include refund of container deposit, “slow and lacklustre handling of claims, including deliberate attempt to unjustly limit liability by shipping agents and terminal operators despite acceptability of the liability.”

    The source, while admitting that the Council lacks the power to sanction, urged aggrieved the public “to come forward with relevant evidence while making their complaints”.

    Speaking at a forum, an official of the Council, Mrs. Celine Amaka Ifeore, blamed terminal operators, shipping firms and other service providers for the high charges and the delay in the clearing.

    According to the NSC, there were six charges at the port before the concession, adding that under the new arrangement, they have increased 20.

    Lamenting the increase increased charges collected by the operators, Ifeore identified storage/rent fee as the most exploitative.

    “The Minister of Transport in 2002 approved N4,000 as progressive storage charge, but the terminal operators arbitrary increased it to N8,000 and then N12,000 without approval from government,” she added.

  • Banks’moment of truth

    The Central Bank of Nigeria, at its last Monetary Policy Committee (MPC) meeting, introduced a new variant to the Cash Reserve Ratio (CRR). It retained the ratio for private deposits at 12 per cent and raised that for the public sector. This, inadvertently, reduced the money available for lending, reports, COLLINS NWEZE.

     

    •Race for deposits over CRR hike begins

    It is common knowledge that government, whether at the centre, or states, is the biggest spender in the economy. That is why banks depend most on public sector deposits, which are often sourced cheaply from Ministries, Departments and Agencies (MDAs).

    The Nigerian National Petroleum Corporation (NNPC), Nigerian Maritime Administration and Safety Agency (NIMASA) and other revenue generating bodies fall in this category. The funds which are lodged with the banks are advanced as loans to customers, whether corporate or individuals at given or negotiated interest rates.

    This practice, which has seen some banks holding over 75 per cent of their balance sheet in government deposits, is being threatened by the recent decision of the Central Bank of Nigeria (CBN), at its last Monetary Policy Committee (MPC) meeting. CBN is getting increasingly worried over the rise in liquidity from banks purchasing short-term government securities using public sector deposits. The CBN fears that strong liquidity growth could trigger a rise in inflation.

    The MPC’s decision to hold the interest rate steady at 12 per cent at its July 22 and 23 meeting while raising the Cash Reserve Ratio (CRR) on public sector deposits to 50 per cent is being interpreted as an indirect tightening of loanable funds to banks.

    The CRR is the portion expressed as a percentage of bank’s deposit balances, which lenders must have as reserve in cash with the CBN. It is usually determined by the apex bank. The reserve ratio is one of the instruments used to influence the money supply in a country, and drain out excess liquidity in circulation from the system. By increasing the ratio, CBN has reduced the percentage of funds available to banks to lend and do business with.

    Currency Analyst at Ecobank Nigeria Olakunle Ezun said the CRR move is significant given that public sector deposits which stood at N2.5 trillion at the end of March, account for around 20 per cent of total deposits in the banking system. He said aside the existing CRR funds being forfeited to the CBN, an additional N955 billion would be removed from the economy, suggesting the tightening effect will be immediate.

    He said the effect of the decision was expected to be significant, with the yield curve likely to shift up, particularly at the short end, and a likely supportive effect on the exchange rate.

    Before August 7, when the policy took effect, many lenders had sold liquid assets and dollars to replenish their cash balances in preparation for the withdrawal which went on as planned.

    Ezun said the immediate result of the MPC’s decision would be a rise in interbank money market rates, which will increase pressure on investors to divest from longer maturity fixed income securities and to shorter dated securities.

    “Not only will there be the attraction of higher yields at the shorter end of the curve, but, for foreign investors, there will be the benefit of reducing currency risk exposure by moving down the curve,” he said.

     

    Effects on exchange rate

    He said the move to indirectly tighten monetary policy was partly aimed at restoring some level of stability to the exchange rate. The naira remains volatile and has been on a depreciating trend since the start of the year. With a year-to-date loss of 2.9 per cent, the naira weakness reflects a robust import demand that has increased demand for dollar at the Wholesale Dutch Auction System (WDAS) and on the interbank market, thus, weakening oil prices.

     

    Impact on banks

    Analysts have said the new policy would have a negative effect on banks. An analyst with Renaissance Capital, an investment bank, Adesoji Solanke, said though it signals the desire to tighten monetary policy, the measure has added to the challenges facing the Nigerian banking sector this year, and on the balance, the effect is negative for the sector.

    “We view the impact of this as negative for the banks. This is a new measure in addition to the 12 per cent CRR on all deposits, which we believe signals tightening of monetary policy, most likely to protect the naira,” he said.

    The Managing Director, Financial Derivatives Company, Bismarck Rewane, had estimated that the introduction of a 50 per cent CRR on public sector funds equaled N650 billion quarantined, or interest free.

    “The quarantined amount is equivalent to one month and two to three weeks of Federal allocations. Imagine a situation where the Federation Account Allocation Committee (FAAC) allocations are delayed, interest rates will rise sharply due to the cash shortage,” he said.

    He noted that the hike of the CRR on public sector funds by 38 per cent is expected to tighten liquidity, creating a funding gap.

    His words: “The commercial banks’ initial reaction will be to scramble for funds to cover their positions. To do this, banks will repurchase their Asset Management Corporation of Nigeria bonds, sell down on their Net Open positions (NOPs), or seek for more deposits from the government or private sector. The liquidity gap created at the market is expected to result in a three to four per cent spike in interest rates, which are currently at an average of 11.2 per cent per annum.”

    The thinking among banks is that the policy, aside tightening liquidity, would slow down credits, increase interest rates and the delinquency of loan defaults. But the CBN Deputy Governor (Operations) Mr Tunde Lemo said issues on the CRR would be addressed accordingly via dialogue.

    “Don’t forget that as banks get government deposits, the CBN mops it up at Open Market Operation (OMO). CBN cannot just move the CRR from 12 per cent to 50 per cent. It should have been a gradual process because the CBN is not paying any interest on these deposits, one bank CEO, who does not want to be named said, adding that “the equities market will be impacted. This is already happening. People will be compelled to divest from the capital market and this would cause equity bubble.”

    Lemo insisted that the arguments do not hold water because 50 per cent CRR is applicable to only government’s deposits.

    He said: “Liquidity cannot be tight because the stipulated liquidity ratio is 30 per cent and the average in the industry is 68 per cent. So, the excess liquidity should have gone into credits by now. Most of the banks are seating on excess liquidity.

    “In fact, they collect these monies from the government and purchase treasury bills with it, and lend back to the government. The implication is that the government is spending undue percentage of their revenue to pay for their deposits with bank.”

     

    Impact on the naira

    A day after the CRR hike, the naira firmed to a four-week high against the dollar. The local currency closed at N159.9 to the dollar, its strongest since June 19.

    Ezun added that as the indirect tightening takes effect, the holding capacity of banks to speculate against the naira is likely to lessen. This is because there will be a rise in money market rates, which should help underpin the naira.

    A further level of support is also likely to come from banks selling dollars in order to fund short-term naira liquidity requirements.

    “The initial rise in yields would also help generate an attractive entry point for foreign investors, thereby boosting capital inflows, which in turn would be naira-positive,” he said.

    “The fundamental problems that the CBN faces are how to balance competing pressures on the naira that stem from the forces that drive purchasing power parity (mainly through the current account) and uncovered interest parity (via the capital account). Managing these opposing forces remains a struggle that has not been helped by high levels of liquidity that the CBN has struggled to manage effectively,” he said.

    Managing Director, Afrinvest West Africa Plc, Ike Chioke, expressed concerns over both policies, saying there would be ‘unavoidable impact’ of the new 50 per cent CRR on majority of the banks going forward.

    In a report, he explained that the CRR policy implied a significant increase in the banks’ cost of funds, a tensed pressure on the Net Income Margin (NIM) as a larger proportion of the deposits will be held in CBN’s coffers as reserves.

    He predicted that banks may have to sell down on investment securities to call back the 38 per cent, and may re-navigate their deposits mobilisation strategies, re-price risk assets in line with their “cautious” lending strategy and adjust business model.

    Consolidated Discount House Limited, however, raised strong fears on the naira’s stability, adding that CBN Governor Sanusi Lamido Sanusi will ensure the defence of the local currency till his departure from the bank.

    Beyond these, it said the depletion of the naira would have strong domino effects on the system. It would lead to negative carry trade and higher import costs for local businesses. It said the single digit inflationary outlook for the second half of the year is largely anchored on stable exchange rates.

     

    Banks’ strategic responses

    Aware that the CBN is committed to implementing the policy, many banks, last week, held emergency meetings during which they reviewed the percentage of their public sector funds and how to address the likely impact of the policy on their operations.

    Group Head, Retail Banking, Skye Bank, Mrs Arinola Kola-Daisi, said the only option for the banks was deposit mobilisation.

    She said:” The government is the biggest spender but there is also the need to focus on retail business because of immense opportunities there, too. Banks are now mobilising deposits because that’s the only way out.”

    She said banks needed to expand their retail banking bases, and improve customer services.

    “The truth about the CRR hike is that there is nothing to do other than to mobilise deposits. We have a significant deposit of public sector funds. It is a tough time for everyone. Everyone is looking for institutional investors that will give them money. The banks are also building their retail banking businesses. As I said earlier, retail banking is a game of numbers,” she said.

    Mrs. Kola-Daisi said banks have to focus their attention on getting deposits from other areas, stating that people must go wherever the money is to ensure that they get the needed deposits. That, she said, will make everybody sit up. It will also make people put in their best because there is no magic except to bring in more deposits. Now, all the banks are looking for one thing, it is tough, but we will get on with it.

    “There is nothing we are going to do and they are not going to change the policy. We have to work with what is good for now, and make sure that we go out and get more deposits and get more customers too. You also make sure that we work aggressively on the inside to improve your services. It is one thing to bring deposit, and another thing to retain that deposit in the system”.

    “Retail business is also difficult because you need to know what people want. People are not looking for complicated products, they are looking for simple, cheap and easy to access products that can add value to their businesses and lives,” she said.

    Stanbic IBTC Regional Head, Nigeria, Lincoln Mali said he would be adopting the Standard Bank in South Africa approach to retail lending in Nigeria. He said that the bank is not yet strong in retail business in Nigeria but that is going to change going forward. “In Nigeria, we are not all that known for the retail part of the business and that is what my team and I are bringing into the country. In South Africa, we are strong in retail lending. We will be strong in Nigeria as well. We have started to lend in the retail part of the business,” he said.

    Mali, however, said to succeed in retail lending, there should be more people bringing in deposits than the loans that are given out. Also, there is need to understand the transaction history and balance turnover with demand for loans. He said the bank will also be focusing on lending through credit cards and will ensure that its products and services are visible in every commercial part of Nigeria.

    “We can’t be in the business of risk avoiding. We have to be in the business of risk management. To avoid risk, then you should not be in banking. You need to understand the risk, price the risk and manage the risk,” he said concerning the bank’s commitment to lending.

    Mali said the bank is also committed to getting more of the unbanked into the financial system. “We have been thinking of how to get the unbanked into the banking system. We want to make easier for the unbanked to get into the banking system through our products and services. We have some plans here to do more of agent banking, mobile money and so on. For now, our priority is to get the retail part of our business structured in the quickest possible time. We are also looking at high net-worth individuals,” he said.

    Unity Bank has also emphasised its commitment to deepening retail banking services in the country through branch expansion. The bank’s Divisional Head, Retail Banking, Usman Abaji,s said the plan is not only in line with its strategic direction, but also a natural progression from its history and antecedents of being close to the people.

    Heritage Bank is also eyeing the retail sector of the business with promises of giving out loans to support grassroots businesses. The bank unveiled plans to provide funding for the micro, small and medium enterprise (MSME) sub- sector of the economy.

    Speaking at the bank’s MSME Clinic held in Lagos, the bank’s Managing Director, Ifie Sekibo, expressed the lender’s commitment to assisting MSMEs to become large corporate organisations that can be quoted on the Nigeria Stock Exchange in the next three years.

    Sekibo said the bank was looking beyond deposit mobilisation to assisting subsector to realising their goals, by identifying and solving challenges that challenge their businesses with a view to providing the necessary solution to make them function better.

     

    Interest rate

    Interest rates in Nigeria have been broadly stable since ending of 2011, hovering 200 basis points around the Monetary Policy Rate (MPR) that has been held at 12 per cent since October 2011. The MPR increased steadily from September 2010, from a then low of six per cent to 9.25 per cent in early October 2011 before it was raised sharply to the current 12 per cent.

    This helped to reduce liquidity and strengthen the short end of the curve, along with earlier changes to indirect monetary policy instruments on 24 July 2012 the CRR was raised to 12 per cent from eight per cent and the Net Open Position of Shareholders’ funds was cut to one per cent from three per cent.