2018 CIBN Annual Lecture by Prof. Kingsley Moghalu

13 Jul 2018
Kingsley Moghalu

Summary

The Asian economic miracle is an example of the government setting a vision, and the banking system aligning closely with the vision.

Prof. Kingsley Moghalu delivering the 2018 Annual Lecture of CIBN

This being the text of the 2018 Annual Lecture of the Chartered Institute of Bankers of Nigeria (CIBN), titled “Of Banks and Bankers: Finance and the Challenge of Economic Development in Nigeria,” delivered by Prof. Kingsley Moghalu, former Deputy Governor, Central Bank of Nigeria; and President, Institute for Governance and Economic Transformation, at the Bankers House, Lagos, June 28, 2018.

Distinguished Bankers, Ladies and gentlemen. It is indeed an honour to address this gathering, given the importance of banking to the wealth creation of any modern society. The Chartered Institute of Bankers of Nigeria has become an important institution to foster best practices in the Nigerian banking industry. I want to congratulate the CIBN and to wish the new CIBN President, Dr. Uche Olowu, all the best in the actualization of his agenda, while wishing the outgoing President, Professor Segun Ajibola, all the best in his new endeavours.
    
I want to begin by reminding all of us that capitalism is a philosophy. The necessary qualification is that there must be an appropriate balance between the roles of the state and the marketplace. It is, therefore, essential to develop a philosophical underpinning to Nigeria's capitalist economy that goes well beyond a transactional approach, which is what we mostly see in the management of the Nigerian economy.

The three requirements for the success of capitalist economies are: (a) property rights; (b) innovation; and (c) capital.  Understanding the interplay of these three factors is essential for structural economic transformation. National economic policy must, therefore, address this relationship instead of a narrow focus on finance. This narrow focus on finance, nay banking – which is a sub-set of finance -- is what has prevented the liberalization of the Nigerian economy since the 1980s and limited the achievement of the economic transformation we so badly need. We have therefore remained a country in which poverty is on the rise while a small class plays with the much finance available in the economy.

The starting point for appreciating the current landscape of the Nigerian banking sector began in 2004, with the recapitalization of banks under the leadership of Chukwuma Soludo at the CBN. This exercise, while initially controversial, strengthened our banking industry. However, the newly recapitalized banks, rather than focus on becoming engines of economic development at home, focused on globalization. While it is true that our banks began to be the face of a new Africa Rising narrative, a sign of a continent ready to take its place on the global stage, the facts were slightly different. Our new giants had feet of clay, and many of our biggest banks took decisions that brought our banking system to the brink of collapse.

Overexposure to the oil and gas sector in those heady days meant that when the tide went out as a result of the global financial crisis, a substantial amount of non-performing loans became the order of the day, as well as weak corporate governance and capital adequacy. The subsequent reforms put in place under the leadership of Sanusi Lamido Sanusi as Governor of the CBN from 2009 to 2014, including importantly the establishment of the Asset Management Corporation of Nigeria (AMCON) to buy non-performing loans and aid financial stability, put the Nigerian banking sector on an acceptable footing.

Beyond all these reforms, however, it has to be understood that a deep and efficient financial system is crucial for the economic transformation of an economy. At its heart, banking is about collecting deposits from customers, and channeling those resources to productive parts of the economy, thereby fostering innovation.

Unfortunately, what obtains by and large in Nigeria's economy today is the oxymoron of capitalism without capital. The ratio of bank assets to GDP in Nigeria is 30.3%, compared to 103% for Egypt, 120% for South Africa, and even 60.8% for Kenya. Private sector credit as a percentage of GDP is only 15.7% in Nigeria, while Egypt and Kenya have more than double this figure.

What these figures make clear is that Nigeria's banking system does not have the necessary depth to power economic growth. What has happened instead is that Nigerian banks focus on high net-worth individuals and government clients, as well as FX trading, treasury bills, and so on.

Lessons from Asia

The most important economic achievement of our lifetime, has been the strong economic growth and transformation of Asian nations, with hundreds of millions lifted from poverty as a result. China alone reduced absolute poverty from 88% in 1978 to just 2% today. Other countries like Taiwan, Korea, Japan and more recently Vietnam, have accomplished similar feats. These feats were the result of governments that clearly understood what they wanted and how to get there.

The role of the banking system in those countries was to lend only to firms that could prove they had export orders. The lending banks viewed export performance as an indication of the creditworthiness of borrowing firms. In order to cover the subsidies to agriculture and manufacturing, banks paid interests on bank deposits that were below market rates. This was possible partly because East Asian people tend to have high savings rates.

That is one of the major differences between them and us. The Asians supported subsidies for production, while we subsidize consumption through petrol subsidies and fixed exchange rates.

The Asian economic miracle is an example of the government setting a vision, and the banking system aligning closely with that vision to unleash prosperity for hundreds of millions of people. Only when fiscal and monetary policy align can the same happen in Nigeria.

Financial inclusion

There are a few paradigms by which you can examine the problem of financial inclusion in Nigeria. First, there is the reality that only 41.6% of Nigerians have access to financial services. The CBN target of 80% financial inclusion by 2020, seems like a long way away. There is also the issue of geography. Of the credit that is available, 77% of it comes to Lagos, a state with less than 10% of Nigeria's population. No economy can hope to have sustained, inclusive growth under those circumstances.

In terms of gender, financial inclusion is also stark. 46.6% of Nigerian women nationwide do not have access to financial services, as against 36.8% of men. This is a fact that is unfortunate when put side by side with available evidence that shows that women are better borrowers than men. Improving financial support for women would markedly increase the number of women venturing into new businesses, which in turn will foster economic activity.

The banking sector must do all it can to close these gaps. One way to achieve this is to bring the millions in Nigeria's informal economy into the formal sector, including making innovative use of the ubiquitous mobile telephones that are owned by 140 million Nigerians. Beyond this, more private sector regional banks in geopolitical zones should be encouraged as a matter of policy, so that finance is located closer to rural and semi-rural populations as well as the urban small businesses.

Banking for women

Increasing financial access for women should be a priority. The Central Bank can assist in this by revamping its micro-finance policy, which has so far not achieved the vision that inspired the institution of microfinance banking in Nigeria, namely to serve mostly women and be owned mostly by women.

Microfinance has been successful in Asia but has not succeeded in Nigeria. The reason is the concept was predominantly female-oriented in the Asian countries, while in Nigeria microfinance has been erroneously operated as mini-commercial banks by those whose banks were unable to meet the consolidation targets back in 2004.

N1 trillion venture capital fund

Access to finance has been identified as the biggest obstacle to the business – and therefore job creation – growth of small and medium enterprises and microenterprises in Nigeria. The World Economic Forum's Global Competitiveness Report 2016-2017 ranks Nigeria 132 in affordability of financial services, 129 in ease of access to loans, and 130 in terms of venture capital availability.

As most members of this audience must know, I am running for election to the Office of the President of the Federal Republic of Nigeria in 2019. I believe that the number one policy response to the weak levels of access to capital in our economy must be access to capital, in particular private equity and venture capital. Evidence across economic jurisdictions in Africa, the United States, and Europe makes clear that private equity and venture capital investments in small firms create more jobs than the formal corporate sector.

What this means is that Nigerian economic policy should encourage far more investments, local and foreign, in private equity and venture capital. The market for such investments is obvious and that is why if elected President, I have committed to establishing a venture capital fund of a minimum of N1 trillion to facilitate the creation of new businesses and support business owners across the country.

In my vision of this fund, it will be a public-private partnership in which the federal government invests N500 billion and the private sector invests an equal amount. The venture capital fund will be managed by the private sector investors for profit, but the fund, even in that context, will be structured to address some social needs that intersect with commercial wealth creation, such as easier access to capital for women. By its very nature as a venture capital fund, its investments will be equity capital investments rather than credit, which is hard to come by for small business, and exorbitant because average interest rates on loan repayments are 20 per cent.

Venture capital is critical for Nigeria's – and Africa's – economic transformation. It is long-term funding that is focused on firms that are too small and/or do not have the necessary track record to get money from commercial banks, because they are considered too risky. In those risks, however, there is reward.

Since it is linked directly to job creation, the impact of venture capital funding on a country like Nigeria where small firms and businesses are the primary mode of economic activity, will multiply the number of jobs those small businesses can create. In addition, technology and innovation-focused venture capital will bolster Nigeria's emerging tech ecosystem, to increase economic complexity and aid a shift away from natural resources as the basis for economic growth.

In recent times, there has been an increase of venture capital and angel investing in our tech space. This is good; and must be deepened.

The venture capital fund I envisage also will address another structural problem of our economy in addition to job-creation and stimulating business growth. It will scale up funding for innovation, which is a core component of successful capitalist economies. This goes well beyond funding IT start-ups, for there are many other kinds of innovations that could drive industrialization in Nigeria but which do not receive funding support for mass production of new inventions and innovations.

Is capital enough?

Having said all this, capital is but one of the factors of production. Land, labour, technology and entrepreneurship are others. When trying to measure the ease of doing business in a country or rank global competitiveness, the cost and availability of capital are just two of the variables taken into consideration.

This is where we come face to face with the reality of the lack of vision and courage in our political leadership, and the lack of alignment between fiscal and monetary policy, which I briefly touched on earlier.  

Nigeria's commercial banks can definitely do a lot more to finance SMEs and promote financial inclusion, but there are other structural forces at play. Issues like lack of power supply, cumbersome regulations, multiple punitive taxes from an array of rent-seeking government agencies and outdated laws like the Land Use Act, which in my view should be repealed, all combine to affect the viability of Nigerian SMEs.

The Land Use Act in particular vests all land in the hands of the state governor, who then leases it. The ability to freely trade land will bring that dead capital under our feet to life, making a lot more capital available. This blockage is intricately linked to the paucity of capital in the Nigerian economy.

For example, it can take NAFDAC up to two years to issue licences. They also require the rental of a five-bedroom apartment. What amount of capital can make up for this? What amount of capital can make up for the stifling regulations that business owners have to put up with on a daily basis?

Efforts by the Central Bank of Nigeria to close the “capital gap” in the Nigerian economy through its various development finance interventions have also not yielded the desired results and have had only an ameliorative and incomplete impact. There are two reasons for this. The first is that, without the necessary structural reforms in the Nigerian economy regarding the requirements for a successful capitalist economy and fixing the infrastructural problem such as inadequate power, CBN financing will be unable to address root problems.

Second, there is at least anecdotal evidence that political interference in the development finance policies of the CBN have also limited their impact. The Central Bank is gradually being turned into a fiscal agent that carries the can for the failure of the federal government to develop and execute effective fiscal policy that generates revenue for the financing of initiatives the government has responsibilities for. This is another reason a mega venture capital fund is so necessary in Nigeria.

We must reduce our reliance on commercial banks for finance if our economy is to achieve real transformation. This is because structural economic transformation requires the availability of long-term capital of up to 15-20-year tenors. Commercial banks, which are the source of virtually all capital in Nigeria, are not designed to serve this purpose because most commercial bank loan repayments cannot be structured to last beyond five years.

Enter development banks.  They are active in Nigeria, but again have not achieved transformative outcomes. This is because they have not been well conceptualized. Let's take the example of the Development Bank of Nigeria, which has a mandate for wholesale funding of small businesses. This is a misconception because that is precisely what a large public-private venture capital fund or a United States Small Business Administration-type entity should be doing.

The DBN should be funding big-ticket infrastructure transactions with long-term capital in the same manner as the BNDES in Brazil. The BNDES has played a key role in Brazil's emergence as a bona fide emerging market. Redefining the mandate of the DBN would also enable Nigeria to at least put a stop to the current trend of unsustainable foreign borrowing that has created unhealthy pressures on our revenue-to-debt-service ratios. A newly redesigned DBN should be funded with a first-line charge on the Consolidated Revenue Fund of the federation.

Conclusion

We are yet to scratch the surface of what Nigeria's banking and financial sector can do to drive growth. This is partly due to the historical orientation of our banks to focus on only a small segment of the economy, neglecting the real economy. There needs to be an urgent broadening and deepening of options for financing that can put Nigeria on the path to significant, sustained, and inclusive economic growth and transformation.

A critical second part of this equation is the necessary political will for broad-based reform of the Nigerian economy by our political leadership. This will have the effect of aligning fiscal and monetary policy for maximum impact.

As elections draw closer, it is my hope that we can make the necessary decisions as a society to break away from the failed leadership that has kept Nigeria so far from its potential.

Only the best is good enough for our people, our economy, and our country.

Thank you very much.