Mr Femi Ademola, a Chartered Financial Analyst (CFA) and Fellow, Institute of Chartered Accountants of Nigeria (ICAN), is the Managing Director, AIICO Capital Limited. A well-rounded finance and investment expert, Ademola’s core competencies resonate around origination and execution of advisory, capital raising deals, mergers and acquisitions, structured operation and financing, among others. In this interview with Deputy Group Business Editor, Taofik Salako, Ademola speaks on the banking recapitalisation, macroeconomic policies and infrastructural development, among others.
How do you see the new banking recapitalisation impacting the banking sector, and entire financial system?
The announcement of the new banking recapitalisation appears to be a welcome development for the banking sector and the financial system as a whole. The country and the banks have started to underwrite large ticket transactions that requires stronger balance sheets and stronger counterparties to consummate. The strengthening of banks’ capital base would therefore enhance their capacity to increase financial intermediation and support more growth sectors.
However, while the announcement of the recapitalisation in itself is not unexpected, the exclusion of additional tier-1 capital, such as preference shares and convertible debt and the banks’ other reserves, especially retained earnings, is unexpected and creating a serious fuss in the market. Since the retained earnings are distributable earnings that belong to the shareholders, it is expected that it should count as part of capital available to run the business. It is even more confusing when the CBN recently said that the huge income recorded by banks due to exchange rate devaluation on 2023 should not be distributed as dividends due to possible reversal of fortune when the naira strengthens. So, the shareholders are not able to get the income as dividends and won’t also be able to recapitalise as share capital. This appears ludicrous since the shareholders would have been asked to provide additional fund to recapitalise the bank should this have been a loss to the bank.
One other issue that needs to be clarified is in a situation where a bank meets the share capital and share premium required but has negative other reserves thereby making its shareholders fund to be lower than the minimum requirement but in line with the CAR requirement. How would this be dealt with?
It is clear that the CBN wants the banks to be freshly capitalised. However, it must be careful not to create unnecessary uncertainties in the banking industry. I will suggest that the apex bank conducts a stress test for the banks and estimate what should be provided for from both existing liabilities and contingent liabilities. What is left in the retained reserves of the banks should be capitalised by increasing the share capital and share premium to the required minimum capital. This would be done through the issue of bonuses so as to move the fund from distributable reserves to non-distributable reserves; thus, preventing any cash payout from the banks’ capital.
The Nigerian banking sector had had too many past policies that roiled the market. It would be nice if we could make this one to be very smooth without creating any negative investors’ confidence for our banks and the banking industry.
Is there any justification for the new minimum capital requirements?
The requirement for the recapitalisation of Nigerian banks by the CBN is expect and arguably long overdue. Considering the increase in the volume and size of financial transactions since the conclusion of the last recapitalisation exercise by banks and the dynamics of the Nigerian banking sector, it has become necessary to strengthen the banks financial positions. In addition, the naira exchange rate averaged N133 per dollar during the last consolidation; hence it is not out of place to request for up to an average of 10 times of the minimum capital to align with the current exchange rate of some N1, 300 per dollar.
Given your core experience in investment banking, what’s the prospects of banks pulling through, will there be rampant mergers and acquisitions, or most standalone?
It would be difficult to provide a straight forward answer to this. First, it would appear that almost all the banks in Nigeria would need to raise significant amount of capital to meet the minimum capital base especially due to the non-inclusion of their additional tier-1 capital. Hence, while most of the biggest banks in Nigeria, usually termed Tier-1 banks, may be able to raise capital, it may be a struggle for the smaller and newer banks. In the recent period, the common means of attracting equity capital is through rights issues. Since most non-controlling investors are unlikely to put additional money in the banks, the banks would be limited to attracting capital from controlling shareholders and in few cases, new investors. In my opinion, I think the big banks would be successful in attracting needed capital, the mid-tier banks would consider license downgrade, especially from international licence to national licence, while the lower-tier and newer banks would be involved in mergers and acquisitions. We will have more clarity by end of the first half 2024 when most banks would start to make their capitalisation strategy public.
What’s your assessment of the current monetary stance of the apex bank?
The general mandate of the monetary authority is to ensure price stability, that is, inflation rate, interest rate and exchange rate, using all policy instruments at their disposal. Considering where we are by the middle of 2023, the current monetary stance appears to be appropriate in curbing run-away inflation and exchange rate volatility. The monetary tightening is required to mop up the liquidity surfeit in the system and to also attract foreign investors to Nigerian instruments. However, as noted of all monetary policies, they are short term in nature; hence there must be adjustments as necessary to provide the desired results.
What are your suggestions on areas of improvements in CBN’s policies so far?
The monetary authority is only a part of the government, hence the CBN must not equate itself to the Federal Government. There are roles to be played by both the monetary and fiscal authorities for better effect. In the management of inflation, studies show that the CBN, using its policy instruments simultaneously is only able to control 48 per cent of inflation and that is in the long run. Same for economic growth and exchange rate. This indicated that the limit of monetary policies in solving Nigeria’s economic problems and the need to collaborate with the fiscal authorities.
The CBN should also note that the short-term nature of its policies makes them to be felt quicker than the fiscal policies. Hence the CBN must be flexible enough to adjust policies in line with realities on ground. This is even more so because operators are usually ways ahead of the regulators in terms of creativity and innovations.
What’s your assessment of the fiscal environment and suggestions on complementary policies necessary for target growth?
The fiscal environment has been battered by political brinkmanship, insecurity and other social vices to the extent that the fiscal authority hitherto appeared non-existent in Nigeria; hence the last CBN administration took over the roles of the fiscal authority through the various intervention programmes. Things appear to be changing but the lag in feeling the impact is not helping. And the most significant action from the fiscal authority would be to reduce insecurity considerably so we could boost food and oil production for both local consumption and export. To improve economic growth, Nigeria only needs an improved environment for doing business and the provision of infrastructure, chiefs among which are energy and transportation. Nigeria will grow quite rapidly if we could curb insecurity and provide energy and transportation infrastructure.
What’s your assessment of the outlook for the economy in the medium to long term?
While every government intervenes in its economy in order to stimulate growth, improve the well-being of its citizens and achieve or desired objectives, the most successful ones allow commodities prices discovery through the market forces. Although governments provide targeted subsidies to protect sectors and citizens, rent-seeking is reduced to the minimum through free market system. In my opinion, the removal of subsidies for energy and exchange rate are the right decision and would add to the positive stories of the country in the near future, if we allow it. Nigeria has what it takes to be a top world economy in the long term.
With Nigeria’s huge infrastructural gap, what best creative ways for the govt to bridge this gap, especially given its limited resources?
There is no doubt that there is a huge infrastructural gap in Nigeria. But as experienced in most countries, the government alone cannot bridge the gap. The most appropriate way is to create an enabling environment for private capital to fund this requirement. Unfortunately, Nigeria’s reputation for political brinkmanship and non-enforceability of contract affect how we get to source funding for these investments, especially from the international market. Hence, we need to develop our home-grown solutions to fund the gap. One such solution is the Road Infrastructure Tax Credit Scheme which has been used by several companies like Dangote, Access Bank, MTN and a host of others to fix certain roads. This kind of brilliant innovative means of funding the infrastructure gap is very laudable.
If you have a few minutes to advise the President, what are the quick fixes and low hanging fruits you will suggest under this current environment?
Unfortunately, at the point of taking over this government, I can’t see anything that would require a quick fix. The elephant in the room is insecurity that has chased farmers from the farms and the country reeling in income losses from oil. Dealing with these security issues-both militarily and politically, would be very ideal.
In addition, I am a protagonist of the removal of subsidies especially the ones that benefit the upper-class people more than the poor. To support the people that might be mostly affected by the removal of subsidies, the introduction of ‘conditional transfer’ should be considered. And we do not need to reinvent the wheels. We can copy from the successful Brazilian Model, The Bolsa Familia Programme.
Bolsa Familia Programme is a conditional cash transfer programme that seeks to help reduce current poverty and inequality by providing a minimum level of income for extremely poor families and break the inter-generational transmission of poverty.
Eligibility for the transfers is based on beneficiaries’ compliance with three specific human capital requirements. First, for a family to qualify for cash payments every month, children must stay in school until age 17, and attendance must be at least 85 per cent up to age 14 and 75 per cent thereafter. Secondly, children must get the full set of vaccinations in their first five years. And finally, mothers must attend pre and post-natal care.
The BFP programme targets poor and extremely poor families throughout the country. The adopted income ceilings for eligibility were set at a fixed monthly per capita family income of R$100 or US$48 for moderately poor families and R$50 or US$25 for extremely poor families.
What roles will AIICO Capital play in the banking recapitalisation?
AIICO Capital Limited is a leading Asset Management company in Nigeria. The company is transitioning to a financial services company that would provide other services outside of wealth management out clients. For the banking recapitalisation, AIICO Capital will provide advisory services in various means as our licences permit. These would include capital raise strategy formulation, investors engagement and other strategy implementation during the process.
What are the unique selling propositions that differentiate AIICO Capital in the marketplace?
Over the years, AIICO Capital has built a great reputation for itself in terms of capital preservation, capital appreciation and wealth transfer. Leveraging our relationship with AIICO Insurance Plc, a leading life and non-life insurance underwriter in Nigeria, we have been able to provide multi-currencies products portfolio, insurance-linked investment products, and customised products and services in line with the lifestyles of our clients. We are able to legally and innovatively create products and services that fit the particular needs of our clients. And we are able to mobile sizeable investable assets for investment in pre-qualified instruments and businesses.
What are your corporate targets over the medium term?
The corporate target of AIICO Capital Limited is to become a leading financial services firm in Nigeria and Sub-Saharan Africa by providing bespoke solutions and creating premium value to meet the evolving needs of our clients.
