Managing Director, Jaiz Bank Plc, Mr. Hassan Usman, is a fellow of the Institute of Chartered Accountants of Nigeria (ICAN) and a first-class financier. In this interview with Capital Market Editor Taofik Salako, Usman, who heads Nigeria’s first and only full-fledged non-interest commercial bank, speaks on the national budget, macro economy, banking and other issues.
If you look at the operating environment for banking sector generally, is there any improvement in recent period?
Well, you can say over the period of 2016. You know we went into a recession in 2016 and there is no doubt banks have been affected and the impact of that will not have gone by the beginning of 2017, so it was still around as things were being sorted out. I think with the small growth that the economy is witnessing, we will see an easing of some of the problems witnessed during last year and some part of this year. I don’t expect significant improvement in the performance of the financial sector in 2017 but if the government implements the 2018 budget that is being proposed, I am assuming that the Senate will not make significant changes to the budget, I see a situation where economic activity will pick up in 2018. I, therefore, expect that some of the issues that had hindered performance in the past would probably be sorted out during 2018 and then you will see, most likely, banks doing better by the end of 2018.
Banking is about risk management; what structure, especially with Islamic banking, have you put in place to ensure that you have a water-tight risk management system. Secondly, there are concerns that competition may make Jaiz Bank to compromise and try to find a middle way between conventional and Islamic banking, what processes have you put in place to ensure to its core values?
Risk management is of great importance in finance. The regulators have given a lot of attention to risk management in the last four to five years. Each organisation is ensuring that it puts a strong structure to efficiently manage not just credit risk, but also operational risk, market risk, liquidity risk; and these are fundamental to the operations of any financial institution and Jaiz Bank is not an exception. We are working hard to ensure that the structures, systems and controls, and all the tools that are required to ensure that the operations of the bank is safe and sound are adequate and dynamic enough to cope with everyday operation because that ensures sustainability, it is not about our operations today or tomorrow but operations that are sustainable and safe and sound. That is a key commitment of Jaiz Bank and we are working hard to ensure that these tools are in place. Also, we have our core values, we have engraved them in our governance structure in such a way that they are being monitored every time to avoid any possibility for us not to meet our core mandate of running Islamic banking whatever the pressure may be. You have to know that in our internal control system, we have embedded an audit function to ensure that every transaction we are doing conforms to what has been agreed as our core mandate. Our products and services are also tailored towards these core values and the contracts of engagements we do are also wrapped up around this core mandate. Besides, we have the Sharia Committee that goes through our operations periodically to see that we conform with our core mandate and where there is any deviation, that is also treated so that income arising from deviation is not also mixed up with the income that are expected to be seen in our operations. So our structure is good enough and in line with best practice worldwide. Even as the only full-fledged non-interest commercial bank in Nigeria, it is important we benchmarked ourselves to global best practice to avoid any situation where you go overboard and to ensure that we are in line with the franchise of the market.
Let’s go back to the budget, what are those suggestions that you will want to pass across?
Well, clearly we are running a very difficult situation today, because you have a budget of about N8 trillion, only about N2 trillion, may be about 25% will go for capital, the rest is going to recurrent expenditure and debts. So this is a big problem and I think that the government has to do something about it. I know it is something that cannot be done immediately; it is something that is needed to be looked at continuously to address this unsustainable recurrent expenditure budget. I think that is fundamental but that is not something that can be done in one year, it is something that needed to be looked at and it is going to be very painful, it is not something that you do when you are in a recession, it would create more problems. I think it is an area we need to look at to see how we can make our government better; we will be able to put more resources into productive capital expenditure that is needed for growth. Secondly, I think we need to have a disciplined implementation and possibly a committee that will monitor the implementation, which will give value to the intention therein stated. Because, budget is an open contract and economic agents are going to work with it. So, if the implementation is wrong, it will seriously affect others because they would have moved in the direction that the government initially stated in the budget. So, disciplined implementation is significant. These are the few things one can easily say without going deep into the budget.
You expressed optimism that Sukuk bonds will grow in West Africa, what gives that optimism?
Well, Nigeria is about 50 per cent of West Africa and if there is a need for anything in Nigeria, then that need transcends beyond the country. Besides, Nigeria is a late comer in issuance of the Sukuk, Senegal had issued, Cote D’Ivoire had also issued. These are countries that have issued and more are going to come because the infrastructure need in West Africa is huge. When you look at Nigeria, there is none of this infrastructure need that is not looking for intervention. If it is power, oil, health, education, all of these require massive funding, the 2018 draft budget indicates capital expenditure of about N2.4 billion, now the deficit of the government is N2 billion which means almost every capital expenditure is going to be financed by the deficit so you have to have a process or way to get this money. Sukuk is an excellent way to deal with this in a disciplined manner, funding that will be directed to specific project and the system ensures that there is accountability in the end.
But if you look at the Sukuk that was issued, the over subscription was just like N5 billion. Do you think there is enough depth that will take a recurring issuance or higher value of Sukuk issuance?
You see, Sukuk does not ha
ve to be only in Naira, you can have Sukuk issued in Dollar just like you have Eurobonds and Dollar-denominated Nigerian bonds. In any case, you need government to move away gradually from the Naira debt. Government has a target of refinancing Naira debts, so instead of borrowing more, some of the funding needs can be directed to Sukuk.
If you look generally at the issue of non-performing portfolios, why do we have non performing portfolios in banks and what is Jaiz Bank doing to ensure that it keeps such occurrence at the barest minimum?
You know once you are in the business of financing you will definitely have to cope with the challenge of non-performing portfolio because one of the basic assumptions that you cannot ignore is that not all of these funds will come back on time or come back at all. The important thing is to minimise the level of non-performing facilities. In Nigeria’s case, in addition to the normal risks, Nigeria went into a recession and when you have a recession, the economy agents are not going to be doing well. Now, these economic factors will have effect on their obligations, even government may struggle to service their obligations. So, these are things that most financial institutions are meant to cope with, but it is not always the case that you would see the same magnitude of impact on the various economic agents; depending on the type of areas you are exposed. In Nigeria, there are additional complications by the ways and manners of some of these traders-like the petroleum traders, expose the banks to significant risks, because they have no way of controlling many risks.
What is Jaiz Bank doing to ensure that you do not have burgeoning non-performing assets?
Again, you see Islamic banking is a little bit different because first we do not lend money, we sell, so there is always an underlying transaction and as such there is less likelihood for diversion because diversion is one factor in deterioration of facilities. Similarly, we tend not to continue to take income when there is difficulty with the facility. For example, if I sell to you as a customer, I am only entitled to the selling price, so if there is any real difficulty, I can only insist on recovering the exact amount of sale, whatever penalty I charge to avoid moral hazards does not come to the bank. So, the bank does not see such charge as an income and it does not go to bloat the profit and loss account of bank unlike in the case of conventional banking that when you take an overdraft and you are not settling it, it continues to generate compound interest on the account. So if I sell to you, I will only recover the sale price so you can see I may not be that profitable in the short run, but in the long run it will be more real than conventional situation.
Sir, if you look at the third quarter 2017 result of Jaiz Bank, the profit grew by more than 200 per cent, what is driving this growth?
A lot of things is driving this positive development. Islamic banking or non-interest banking is new in Nigeria but it has values and the value-addition is what people have seen, otherwise, you won’t see the trajectory of growth you are seeing. More and more people in the banking industry are now coming in to open accounts with us because they have the notion of the benefits of non-interest banking system.
Secondly, we have people who are ready to sign in, not necessarily Muslims, people who can see the value addition; the type of services we provide and the nature of our investments; we engage with our customers as partners, we insure the profit and the losses, we also try to understand specific situations where there are difficulties, we tend to be more listening than otherwise if we were to be more conventional so these are some of the value additions you see and with our type of banking, this growth is expected. All over, Islamic banking is growing about 10 per cent; we are growing at higher rate because this is ultimately the phase we want in Nigeria.
So sir, if you look at your projections in the medium to long term, where do you see Jaiz Bank?
Well, if you look at the way we are, the need and the fact that the industry is becoming expansive, we can look forward with hope to a bright prospect. With the introduction of the Sukuk, the field is being leveled gradually, because now non-interest banks can now have liquidity instrument to invest their surplus liquidity or to invest their liquidity before they engage their customers, which means they will not be losing as we’ve been losing for the last five years. And also with the huge gap of funding required for infrastructure in Nigeria, I see that this sector is going to be very strong, we as a player see ourselves as one of the serious players in the financial system in non-interest banking subsector.
We know Jaiz Bank wanted to do initial public offering, what is delaying this?
No, we didn’t say we want to do an initial public offering. The first public offer we did was in 2004 and that was Jaiz International, subsequently we have gone to the market through private placement and rights issue. Now, of course being small, there is need for more capital but we are taking our time, we are planning it in such a way that we don’t take more capital than we require at any given time. Obviously, we need capital as we grow but we have not put a definite timing for that.
What are you doing to enhance financial inclusion and financial literacy?
By our mere coming into the banking landscape, we have had several people coming into the system, with ease of mind knowing they are doing the right thing, their ethical values are being taken into consideration. So, that has increased financial inclusion and also in terms of utilisation of banking facilities. Part of what we have in our plans is that once the bank settles down, we will focus deeply on financial inclusion because in some places there are no investments and it is not as profitable in the beginning. So, we have come to the point now that we will put our plan for that phase into operation, part of what we promised ourselves is that after sustainable operations, we will go down the ladder into the micro level and see how we can provide education and facilities to boost financial inclusion. We are in the process of doing that now, through technology and others.
One of the concerns is that Jaiz Bank does not have a strong nationwide presence. How are you addressing this and what facilities are available in terms of technology.
We started with only three branches and we are only a regional bank, we eventually got a national licence and we now have 30 branches. We are certain before the end of next year, we are adding new branches, we were only in the northern part of the country; today we are in Port-Harcourt, Ibadan, Lagos, Ilorin and so on. So, we are developing a network of branches across the country. But the issue is not even about many branches because technology now has provided for cheaper means of reaching your customers, you can pull customers with technology just like mobile banking, internet banking and all these financial technologies. We are on all these and also through the ATM network, POS and so on, we use all of these and they allow customers to do banking without entering their branches. We will move more in that direction, to deploy more channels that allow banking to be quite near, to make it sustainable and affordable.
