Tony Okpanachi is the pioneer Managing Director/CEO, Development Bank of Nigeria. In this interview with Assistant Editor, Nduka Chiejina, the consummate banker of over three decades plus experience unfolds his plans for the bank vis-à-vis prospects and challenges of managing a development finance institution. Excerpts:
You are bringing on board different experiences from the African continent. So how do you think this will impact on Nigeria through the Development Bank of Nigeria under your purview?
You know most African countries have similar development and cultural issues like Nigeria. The only difference is that some of them have been able to address those issues better than we have done in Nigeria.
For example, a country like Kenya has done very well with small and medium enterprises in terms of financing, because their economy is propelled largely by the MSMEs sector. They have been able to have lots of funding going into them because they are well-structured. The same principle needs to apply to Nigeria. We need to empower the sector that’s the driver of the economy – the MSME segment. They’re the ones that will create employment, empower people and drive financial inclusion, and other indices necessary for the economic development of any country.
If you look at the experience from other countries, our task is to leverage what works and adapt them to our local context, and of course, do better as the case may be.
What role will DBN play to ensure financial inclusion for the teeming Nigerian population by bridging the gap?
Financial inclusion involves a lot of stakeholders in different ways. First and foremost, it involves people having access to finance; access to having accounts with commercial banks, microfinance banks or any other formal financial institution as long as it involves having a bank account. Nigeria has witnessed significant growth in terms of the statistics of bank account ownership.
But for DBN in particular, our entry strategy will primarily focus on access to credit. For example, for micro, small and medium enterprises, we are in discussions with our partners and financial institutions to know how many new credits they are creating and how will people accessing credit for the first time to fund their businesses access it on a sustainable basis? So DBN is coming at that point and creating access to credit for all the micro, small and medium enterprises.
In the past we’ve seen that some of the development finance institutions with laudable innovations fold up such NERFUND, Peoples Bank of Nigeria, amongst others. So what measures has DBN put in place to avert such calamity?
First, I think the conceptualisation of DBN itself has taken into consideration all shortcomings of the previous banks that have failed. And how have we done that? First, it’s about the governance structure around DBN, which has been the most difficult challenge that most other development banks faced. The governance structure around DBN is formidable and credible. Like a properly structured private sector company, DBN has an independent board that is competitively sourced, a professional management team running the business with best global practice.
DBN is a Public Liability Company (PLC), licensed by the Central Bank and also regulated by Securities and Exchange Commission (SEC).
So you combine a strong regulatory environment, with ethical corporate governance, a formidable board and a competent management team thus the chances of success are predictably high. This is what sets DBN apart.
The second differentiating factor is funding. The funding of DBN and the model is to help businesses on a sustainable basis. How is this done? If you see, DBN has the support from all the major development partners. For example, the funding available to DBN is provided from the World Bank, African Development Bank, the KfW – which is German Development Bank, and AFD, which is the French Development Agency. All these are core partners that came together to provide rich funding for DBN and they also come in with their expertise to support DBN to ensure that the Bank is run in a sustainable and professional way, ensuring best practices.
So from the structure, the funding base, the corporate governance base, DBN is also positioned to do well.
The third thing that I want to talk about is the wholesale model, which DBN is running. Now the wholesale model shows that we are not going to have network of branches. Based on this premise, we have our Participating Financial Institutions (PFIs) who already know how to lend or who already lend to MSMEs. For example, we are currently doing business with microfinance banks because they have a strong MSME base. The commercial banks also rank high on our priority list because they already do business with SMEs, so we are now going to lend through them because they have the network of branches, which will ensure that our funding reaches the grassroots.
Can you let us in on what your capital base looks like?
DBN is going to be the most highly capitalised development bank currently in Nigeria. Yes because our capital base is a N100 billion by regulation. The regulatory capital base is N100 billion, so in terms of capitalisation, that’s going to be one of the largest capitalised banks in the country because by way of comparison, even commercial banks minimum capitalisation is N25 billion. So DBN as a DFI today is capitalised to the tune of N100 billion. But beyond that, we also have funding so the total funding commitment available to us over time is almost $1.5 billion coming from the development partners. So in terms of capital, another strong point for DBN is that it’s coming with a very strong capital base to give it the strength to be able to intervene in the segment (MSMEs).
Is there any legislation required to ensure DBN has requisite regulatory framework?
DBN was set up not by Act of legislation but strictly as a private sector-driven company. So we are licensed by the Central Bank of Nigeria and are a PLC so SEC is going to be our regulator. So Bank and Other Financial Institutions Act (BOFIA) takes care of all the regulatory frameworks.
You mentioned partnering with microfinance and commercial banks, but there is this information that overtime the involvement of these third party institutions will further impede access to funding because of the high interest rates and other mark-up charges. Can we address the attendant challenges with their involvement?
Let me take you a step back and also tell you that our mandate in DBN comes in three folds. The major one is funding, which you are referring to as providing funds for on-lending to micro, small and medium scale enterprises. That is one aspect. The second part of our mandate is also building capacity for the participating financial institutions to enable them do the needful.
And then the third part is the setting up of a subsidiary of DBN. This subsidiary is going to be a credit guarantee company, which will provide partial credit guarantee for lending. Now to answer your question, we all see challenges in different areas while the funding is not getting to them.
Let me take the microfinance banks for example, for them the issue is they already know how to lend to the segment but capacity in terms of funding has been an issue. So DBN will provide the funding and in engaging with them, we are providing funds for their pipeline transactions, since they are bringing their clients for us to fund.
In our transactions with them, we know what rate they’re going to charge their clients, so we are able, in some ways, to influence the rates they’re going to charge so as to ensure that the benefits they are getting from DBN is also passed on to their clients.
Now for the commercial banks, the funding might not be their issue but DBN is also coming with tenor, which is a major advantage of DBN funding. We are providing tenure of up to 10 years, which is not available in this market for now. So tenor of up to10 years, even when necessary, we also do moratorium of 18 months. So effectively, you’re giving funding of almost 12 years to MSMEs that will be able to help extend their business over time. This way, they are able to stabilise their business and repay with ease.
Where the institutions don’t have the capacity or they have challenges in lending, we are also going to provide technical support, offer assistance to them in setting up and making sure they do lending to this segment on a sustainable basis and in a very professional way. So, looking at those interventions at different stages, we expect that the impact will be felt by the MSMEs.
So how soon are you starting the capacity building for these participating financial institutions?
For us in terms of capacity building there’s a segment of it, which will be handled by the Project Implementation Unit (PIU). Already talks are ongoing, consultants are being hired who are going to help in terms of capacity building. In terms of on-lending, we commenced sometime in November 2017 with three microfinance banks.
As we speak, we are already talking to several commercial banks. We are at different stages now of finalising the unbundling process with them to come on board so that we will be able to lend through them. So, we expect that between now and the middle of 2018, you’re going to see many commercial banks also lending out DBN loan.
Is there any rate specified from the onset?
We are benchmarking our rates with the micro economic rates. Because our rate is variable, it is based on the microeconomic indices and for now, it depends on the tenure and the risk profile of the financial institutions we are going to lend through. So we are providing that. But I can assure you that our lending rate to PFIs is much lower than the commercial rates currently in the market.
To really succeed, have you any feedback mechanism put in place?
One of our major departments in DBN is department called Monitoring and Evaluation. And what does that department do? The department goes out to find out how the beneficiaries are utilising these funds. Though we are not taking their direct credit risk, but we also want to ensure that the funds that they get are being used for the right purpose and they’re creating the right impact. So we are going to have an impact analysis to measure the relationship between funding and job creation; has it been able to empower more people, has it been able to bring about further diversification of the economy; which sector of the economy is it impacting more, etc? Because we are not sector specific, but we know there are priority sectors that will also bring about the developmental impacts we want to see, the monitoring and evaluation department would go in and find out if the funds are getting to the right people, how they are being utilised and if the right impact is being made. So that there won’t be issues of funds not getting to the beneficiaries or the beneficiaries diverting funds.
So we will get this feedback, which will always continue to help us to fine-tune our processes to ensure that at the end of it all, we get the maximum impacts we are suppose to get.
On statistics, when you came on board, you met some statistics ranging from 31 million MSMEs and so forth. Are you not looking at conducting new survey at expanding to see how many MSMEs you intend to impact?
In terms of statistics on MSMEs, there’s no need reinventing the wheel I can tell you, Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) has done extensive work in gathering data on MSMEs in the country. That figure currently stands at about 37 million businesses. That information is credible enough for our projections and planning. For the MSMEs and small corporates that constitute this number, we believe that the continuous funding on a sustainable basis will build their capacity for growth and expansion. Remember no single institution can meet the needs of all these businesses. So it has to be through collaboration with all other financial institutions to be able to meet the needs of this growing segment of MSMEs.
So where do you see DBN in the next five years?
In the next five years, I see DBN being a major player in terms of funding for the MSMEs segment. To see DBN as being an influencer in the market, making loan pricing more competitive for the MSME sector. We see DBN in the next five years being a major opinion leader through capacity building so much that access to funding for these MSMEs comes relatively easier on a long-term basis. Because the status quo has mostly been short-term funding, DBN coming with a longer term funding model will allow more businesses stabilise and pay back their loans with ease without the strenuous and tough conditions of shorter tenors.
We also see DBN being a reference point for other financial institutions within Africa and globally, where they will see best practice going on in terms of an institution that is built and run professionally.
The issue of NPL (Non Performing Loans) is a major issue, so what measure are in place to address this challenge?
One of the things we look at when we are dealing with the financial institutions that we onboard is the issue of their non-performing loan. The idea is that banks with high non-performing loans discourage us from lending to them until they put their acts together to be able to improve on their risk management profile to ensure that they lend the funds that they collect. It’s an issue in the industry that bothers every stakeholder and the regulators are paying keen interest to it.
I’m also aware that, most of the financial institutions are now extra cautious and are putting stringent risk management strategies and frameworks to make sure they lend and funds are recovered on an ongoing basis.
