Sterling Bank Plc is empowering people at the lower cadre of the economy by offering non-interest banking services to them. Group Head, Non-Interest Banking, Sterling Bank Plc, Basheer Oshodi, speaks with COLLINS NWEZE on how non-interest banking is changing the lives of people positively and why more awareness is needed to get more people into the financial services net.
Once again congratulations on Sterling Bank’s successful hosting of the Non-Interest banking programme in Kano State. What is really driving the bank’s interest in this segment of banking?
What we observed in this part of the world is economic growth without development. We found out that there is Gross Domestic Product (GDP) growth with increased poverty and unemployment thus there is no relationship between these indicators and better lives for Nigerians. So, poverty is still increasing, it has increased much more from the 1980s to this time. It has even increased much more from 1999 since the advent of stable democracy with unemployment also increasing. Depending on where you are getting your figures from, there are almost 50 million adults without jobs or defined source of income.
Since unemployment is extremely high, we thought that apart from making profit as a business, which could somewhat be achieved easily, it is important to touch the lives of those at the bottom of the pyramid. Yes, we need to give those facilities; such facilities need to be cheap meaning the cost of fund needs to be low. We must also be able to guide them towards accessing market while the conditions of the debt are friendly.
What are the important gains people can take away from non-interest banking?
Access to fund is one thing, reduction in the cost of fund is another and then access to market also becomes very important. Now we thought why can’t we encourage entrepreneurs and High Net-worth Individuals (HNIs) and institutions to give us termed deposits?
Most depositors like to have profit on their deposits. There are, however, others that are willing to leave their funds in current account for a defined term of one year, two years or three years provided such funds are given to those doing micro and small businesses. These businesses constitute 98 per cent of all businesses in Nigeria. In Non-Interest banking, we typically do not give out loans except under a qard-hassan (interest-free loan) for social solidarity or very micro businesses. We are basically engaged in partnership transactions, buying and selling at a markup price, and buying and leasing. That then means that markup price at every point in time is lower than 10 per cent. So, if somebody wants a generator to run her pure water business for example, we will simply buy her a generator and sell-back at a mark-up price of 9.75% per annum, she will only bring 10 per cent security deposit and two personal guarantors.
Are there collaterals for such facilities?
We only accept guarantors for our micro mark-up facilities, which is a maximum of N2 million. Those that want such facilities may even use their personal names rather than a business name and so the cost of doing business is reduced drastically and the cost of fund also is reduced, the deposit that he/she puts on the table is reduced, and the issue of collateral does not arise except the two personal guarantors. When we get funds cheap or at zero cost for a rather long term, and we give it out through ‘partnership’, ‘buying and selling’ or ‘buying and leasing’ mode of finance’, then, we can begin to see social impact or lives being positively touched in good time.
We want to deal with cooperatives in large numbers since we already have funds from some foundations and high net worth individuals. We have since started to disburse while encouraging middle income earners to also contribute as little as N50,000 for one year or two years and add to the pool to funds we extend to the bottom segment.
Of course, this means that unemployment will start to reduce with this approach that promotes self-employment. The truth in today’s Nigeria is that a lot of people cannot be employed, but can start to do their own thing. Only 0.5 per cent of Nigerian companies are large and with our massive population growth, it is unrealistic to employ the over 50 million adult population looking for jobs. With our micro mark-up facility, household incomes can start to increase, and multi-dimensional poverty can reduce. Parents can send their children to better schools, they can have access to better health facilities in the absence of national health insurance schemes and can afford to pay their rent.
So, the idea of the programme is to be able to achieve what we call the primary purpose of non-interest finance which is to impact lives positively, make sure communities are happy and ensure that individuals are pleased. We call this communal well-being and having a good-life. As a bank, compliance with non-interest principles is most essential, followed by achieving profitability. The next most important thing being impacting lives.
You talked about funds coming in from where you can now give out to beneficiaries that will contribute 10 per cent. You mentioned that the funds come from HNIs. But at what cost to you?
It is basically at zero cost. It is just like having current account, a regular current account means that the owner of the money can go to the bank anytime and collect it so I can put in N1 million in the bank today and pick it up tomorrow or next week. So, the idea now is for a lot of people to put that money in current account, but the money will have to stay for one or two or three years. Thus, the cost is almost zero.
It is only where you have money at zero cost that you can give out money far below industry price. Don’t forget that inflation rate is 14.3 per cent, don’t forget that Monetary Policy Rate (MPR) is 14 per cent so banks will ordinarily trade at a price much higher than that.
Are those people putting funds there aware that they are supporting non-interest banking?
In Non-Interest Banking, the underlying contracts are defined. I am putting down this money into a qard (interest-free loan) deposit and it is for one, two or three years, that is the definition of the contract. The other part of it is that the bank should use it for micro facilities. So, the contract is clearly stated out. However, it doesn’t mean that if you want to take your money at any time we wouldn’t give you. When you want to redeem it, all you must do is to tell the bank I want my money back.
I want to know if the people putting down such funds are supposed to share from whatever the business does, or they are just doing it for humanitarian sake?
The first N100 million into this fund came in through a foundation while many of our corporate customers have also started to deposit into the fund. Now we have started to fragment it further such that individuals can also take part. The benefit is somewhat spiritual. From theoretical integral finance model, we refer to this as ‘sanctuary’ with unseen and immeasurable benefit.
How much is in this pool of funds as we speak now?
Beyond the exact figures, it can never be sufficient. In Nigeria we have 70 per cent of our population living below the poverty level whichever way you measure poverty. There are about five major ways of measuring poverty and it shows that Nigerians are very poor. So, even if you have a trillion dollars the problem is yet to be fully solved. What is important is to sustain that model and ensure that it consistently grows.
Also, we want to see how we can get additional funds through retail banking. We need groups, associations and cooperative to believe in this and support such initiative.
Can you name some of the foundations where the funds come from or international bodies that are involved?
Basically, the funds we have now are from local foundations, corporates and individuals. They may not be popular names that you see everywhere. They only seek for the spiritual benefits.
How do you feel, when you see the businesses that are supported with the funds thriving. What joy does it give you and how much of that have you achieved?
From my experience, most people that take micro facilities do not default. Even where for some reasons, a business is not doing very well, and they are unable to pay in a particular month, they are usually able and willing to pay in the following month or immediately funds are received from their business. Occasionally, we give them extension which does not change the profit we charged at inception. The benefit is that we are not putting them under pressure, and they are able to expand their businesses. In Nigeria, and the bulk of Sub-Saharan Africa, assuming you have up to 100 businesses, about 90 of them are macro, another eight are small. So, 98 per cent of what we have in African countries including Nigeria are very small and micro businesses. It may be challenging to take them away from that segment, but helping them sustain their life-style would be fair.
What do you think the regulators in this segment of the market should do to attract more interest in this type of banking because of the benefits that you have listed?
The countries that were listed as third world countries 40-50 years have suddenly emerged as industrialised nations. What really helped them was some sort of equity injections into industries. What we have in this part of the world is debt-based intervention funds, thus the borrower will have to pay back usually within a year. But you know, debt and equity are not the same thing. Debt is usually short-term and can hardly serve certain part of industry. That means that certain industries will not grow. For countries that started doing very well in the last 40 years, like South Korea, Taiwan, Malaysia, and recently, Rwanda, you find out that there are special funds that were injected into industries because they are long term, they are patient and they allow gestation to take place. They acknowledge and accept incubation period. In the first one or two years, you may not make profits, but because the fund is equity there is no pressure to pay before breakeven.
Don’t forget that Nigeria has the most Non-Interest finance regulation in Africa and the Middle-East. So, regulation wise, the regulators have done perfectly well. The infrastructural regulatory platform is already there. I am in support of long-term debts or equity and I am also in support of tying such debts or equity to specific projects so that funds are not unnecessarily mismatched.
Now, we saw the oversubscription witnessed in the N100 billion Sukuk raised by the Federal Government. Does it in any way show the level of confidence people have in this type of banking?
More than 90 per cent of institutions that bought into the Sukuk are conventional financial institutions. That is because it is guaranteed and the return/coupon is fixed. It adds to financial institutions liquidity ratio. If another Sukuk comes out now it would still be absorbed quickly. It shows that the market has matured much earlier than envisaged. People are just waiting for the opportunity to come in.
What are the challenges you think should be tackled to take Non-Interest banking to where it should be?
Like any other sector, it is affected by the overall economic performance of the country. So, the first challenge is that if an Islamic Bank has N1 trillion in its books as deposit, it cannot buy T-Bills or bonds because they are interest-based. The bank would also not be able to invest in other interest-bearing securities and deposits except in compliant instruments like Sukuk. It then means we need to have a lot of such that would create that opportunity on one hand. On the other hand, financial institutions can also be innovative enough and be able to come up with products that will absorb the excess funds so that such funds are not left idle. The only challenge left is in awareness. In fact, those that are banked are more aware than those that are unbanked. Those that are largely unbanked are less aware. In Nigeria, the Northwest and Northeast and more financially excluded than the remaining regions. This means the people need a lot more awareness and the expectation will be Non-Interest banking will attract them to banking.
What is Sterling Bank taking away from this type of banking?
We simply want to bring innovation and flavour to the banking system while impacting communities.