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Why the M-Pesa miracle has failed to work in Nigeria

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Funds transfer in Nigeria has come a very long way. Today, if you want to transfer money to your kid in a University located in another state, all you need to do is open your banking application and punch in the amount, select bank and beneficiary and in seconds the money will get to your child.

The beauty about this is that, you and your child don’t need to have an account in the same bank to ensure that the transfer goes through. You also need not be in the same location or even call anyone to confirm the transaction. Everything is handled in a matter of seconds by the respective banks without having to go through another third party.

Now imagine a world where this wasn’t possible? If you had to transfer funds from your account to your child’s, you would perhaps operate the same bank account instead of separate ones. If you wanted to withdraw money from an ATM, it would have to be the one owned by your bank. Withdrawing from a third-party bank would likely be impossible. This scenario is reality in some African countries today.

M-Pesa is the most popular, no doubt

For a lot of Nigerians looking to start a Fintech company, one of the products often cited as a model for financial inclusion is M-Pesa, the Kenyan mobile money transfer product that has taken the world by storm. M-Pesa allows users to deposit, withdraw, transfer money and pay for goods and services easily with a mobile device. Using a combination of GSM technology and a mobile software application, M-Pesa facilitates sending remittances across the country from one user to another, bypassing the banks. It also relies on an agent network structure that enables users cash money easily without having to visit any bank.
M-Pesa is so successful, it has been viewed as a model for financial inclusion across the world. Such is the popularity of M-Pesa, that several other Startups across Africa have tried to replicate the same model in their home countries. Nigeria is of course not excluded going by the plethora of M-Pesa like products across the country. Unfortunately, none of them have been able to replicate the wonders of M-Pesa despite millions of dollars of venture capital backed investments. The reason why this incredible product can’t be replicated in Nigeria with such success is perhaps due to what you and I as Nigerians enjoy today, the Nigerian Interbank Settlement System (NIBSS).

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The NIBSS was introduced in 1992 by the Bankers Committee following the need to introduce a Shared-Service infrastructure for facilitating payments finalities, streamlining Inter-bank payments and settlement mechanisms, and to drive and promote Electronic Payments across the Nigerian Financial Industry. The NIBSS which is owned by the Central Bank of Nigeria (CBN) and all licensed Deposit Money Banks in the country, drives collaboration with all Nigerian Banks, Card schemes, Processors, Payment Terminal Service Providers (PTSPs), Mobile Money Operators (MMO), Telecommunication providers and other Payment Service providers to improve adoption of Electronic Payment in Nigeria.

This infrastructure is the reason why you and I can transfer money from one bank to another and receive payment confirmation within seconds. All you need to own is a bank account and a mobile phone. You also do not need have an internet connection on your mobile phone to effect transactions as banks have now introduced USSD applications that facilitate transfers between their customers and recipients, again without having to share the same bank account.

In Nigeria, payment for goods and services is also made possible via an infrastructure gateway provided by Interswitch, a digital payment company that commenced operations in Nigeria in 2002. Interswitch facilitates the electronic circulation of money as well as the exchange of value between people and business, allowing them pay for goods and services over the internet.

Why is this important?

Appreciating the impact of Interswitch and NIBSS in facilitating transfer of funds and payment for transactions in Nigeria can help one understand why the wonders of M-Pesa is yet to be replicated in Nigeria and indeed other countries that share similar payment infrastructure as Nigeria. In fact, Kenya, where M-Pesa originated, until recently, did not have an interbank mobile money transfer platform. Thus, before the advent of M-Pesa, Kenyans could not transfer funds electronically from one bank to the other.
Could this be why M-Pesa has such a strong economic moat in Kenya that is hard to replicate across Africa? We are inclined to believe so, particularly in Nigeria. For any Fintech company to try to replicate the success of M-Pesa in Nigeria, they would have needed to be aided by the absence of an interbank transfer infrastructure and an Interswitch to be dominant and grow exponentially.

Some proponents of agent banking will point to the millions of unbanked Nigerians as a reason to be optimistic that M-Pesa can be replicated in Nigeria. Available data suggest that about 30 million Nigerians are captured and have bank accounts, leaving about 50 million more as unbanked. Therefore, for most of these Fintech Startups, the model has been to focus on the unbanked, hoping that the adoption of an agent networking structure would help attract millions of Nigerians who have apathy to banking services.

Unfortunately, targeting this market segment is expensive and requires a lot of patient capital. Nigerian banks are also not sitting idle, as they have the funds, network and economies of scale to target the unbanked through several equally innovative products that can keep them well within the banking system. The result is a winner-take-all and as things stand, deposit money banks appear well positioned to win this battle.

This in our opinion requires that the agent banking model in Nigeria be completely rethought, with a view to ditching the concept that worked so well in Kenya and Tanzania. Focus, should instead move towards the internet banking space where Startups can still garner significant market share. According to data from the CBN, internet web transactions was about 1.7 million valued at N12 billion in June 2017 compared to POS that’s about 11.2 million valued at N107 billion.

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They might as well invest in a business model that can provide an economist of scale that offers agent banking or mobile banking as a part of a network of services that scale on the back of the synergy each product creates. Stand alone services, particularly in Nigeria, have a more precarious path to success. For many start-ups in this space, they will simply die off or remain a drain pipe for venture capital funds.

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The bottom line here is that, Startups looking to replicate businesses that have worked so well in other countries, must learn to identify the exogenous factors that may have been the secret to the miracle. Most times, the secret is not what you don’t know but what you have ignored.

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Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

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Analysis: Access Bank’s valuation highlights merger blues

Access Bank is valued much less than its peers and this is why.

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Access Bank, Star Lager unveil talent hunt show

From green bonds to foreign listings and a determination to plant its seeds across various nations on the African continent, Access Bank over the past few years has shown its desire to grow across its triple-bottom-line. 

On the people front, the bank has a reputation for offering arguably the best incentives to its employees in the banking sector even though last year’s plan to cut down salaries threatened to dent this reputation.

It has also introduced some of the sector’s most innovating products aimed at driving financial inclusion and protecting the bank’s market share from FinTechs. The bank has also supported small businesses through loans and financial advisory in line with the CBN’s quest to improve private sector credit.

READ: Access Bank completes acquisition of Zambian Cavmont Bank Ltd

On the environmental front, it’s spending big bucks on CSR, making a name for itself as a leader in Sustainability, and in terms of dominance, its merger with Diamond Bank and other expansionary measures have turned it into Nigeria’s largest bank and one of Africa’s top banks.

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While these moves have shed a positive light on the bank,  investors are left to play catchup as the benefits of the mergers and acquisitions are yet to result in improved return on investment for anyone who bought the shares over a year ago. 

READ: CBN, NDIC to set up bridge bank for struggling financial institutions

Its low Return on Investment (ROI)  

While Access Bank has many strides to its name, a lot more needs to be done to make it a winner with investors. Its share price has struggled to gain the same momentum achieved by its rivals in the banking sector, particularly the FUGAZ. 

Year to date 2020 Access Bank stock has performed poorly when compared to its peers. While the likes of Zenith Bank (33%), UBA (21%), Fidelity (23%), and FCMB (80%) posted double-digit returns, Access Bank fell by 16% in 2020.

In terms of value, the market prices the stock lower when compared to its earnings, making it one of the cheapest stocks in the sector. This is buttressed by its 2.9x (as of January 22nd) price to earnings ratio, one of the lowest in the sector.

READ: The Nigerian insurance sector; repositioning for efficiency

In the same vein, the Tier 1 bank also has a lower dividend yield compared to its contemporaries and has not been able to breach its 52-week high of N10.90. One reason for this is that investors are wary of the bank’s loan book mostly inherited from its merger with Diamond Bank. Investors will rather go with some Tier 2 banks that have better upward trends in price appreciation than getting stuck with low valuation multiples. 

READ: CBN to increase loans to agricultural sector to 10% of total bank credit

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Access Bank merger blues

As mentioned, one Achilles heel to its valuation problems could be its aggressive expansion strategy, driven by acquisitions. Since its acquisition of Diamond Bank, its valuation has plummeted piling on paper losses for investors who have held the stock since then.

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Access Bank is currently valued at N325.2 billion in market capitalization less than half of its N679 billion suggesting a price to book ratio of 0.47x.

While being large provides the benefits of economies of scale, it needs to be nimble and focussed to milk the opportunities provided by the synergies

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READ; Africa to spend $9 billion on Covid-19 vaccine, access to supply is big problem

The bank recognizes this challenge, recently holding an investor call where it explained its move towards a HoldCo structure.

Access Bank will maintain four core subsidiaries under the holding company. They are Access Bank Group – focussed on commercial banking services, Payment Business – its mobile money and payment services business, Lending & Agency Banking – microfinance and microlending services, and Insurance.

Its efforts in restructuring into a HoldCo structure as well as expansions to other African regions – from Kenya to South Africa, is expected to further enhance its overall returns,  and perhaps drive up valuations. 

READ: Access Bank will no longer accept cheques with logo of defunct Diamond Bank

Fundamental analysis of recent financials 

Access Bank has recorded positive strides in terms of its fundamentals.  In its latest 9 months results, net interest income decreased by 6.6% year-on-year, but profits increased by 15% to N102.3 billion. 

Access Bank also implements one of the most aggressive recoveries of bad loans in the banking sector pulling in N38.9 billion in recovery in 2019 and N24.7 billion in the first 9 months of this year. These recoveries filter into the bottom line and bolster confidence about its ability to confront its challenges and win.

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How Access Bank got Japaul to pay up N37 billion loan that had gone bad

Brute force, Courts, quid quo pro are hallmarks of Access Bank’s debt recovery schemes.

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Access Bank, Scam Alert: Access Bank issues warning to customers over fraudulent acts , Director, West Africa region, IE, Onyekachi Eke, Access Bank lists N30 billion bonds on NSE , Access Bank, Zenith Bank Plc, Access Bank Plc and United Bank for Africa Plc, Zenith Bank Plc, Access Bank Plc and United Bank for Africa Plc, A new BVN guideline to curb e-fraud is coming soon - CBN announces , Access Bank donates 66 laptops to children in underserved communities, Access Bank postpones closed period for 2019 Year-End financial statement, Access Bank dispels rumour about its CEO being arrested, Access Bank set to establish subsidiary in Cameroon after acquiring Kenyan bank, Access Bank finally acquires Kenyan bank, Transnational Bank Plc, Herbert Wigwe: We are clamping down on malaria with the Malaria-To-Zero Initiative, Access Bank to list N15 billion green bond on Luxembourg Stock Exchange 

In 2018 when Access Bank took over Diamond Bank, in what is the largest merger in Nigeria’s banking history, they knew it was not a match made in heaven like their PR agencies will make you believe.

In merging with Diamond Bank and taking over their juicy assets, they had also taken over the lemons that had for years bedeviled the bank who had pioneered mobile banking applications well ahead of its time.

When Access Bank merged with Diamond Bank, the latter had total loans and advances of N787.8 billion out of which N219.9 billion in loans were impaired. Oil and gas-related loans made up a significant chunk of the loans and were estimated at about N302.6 billion, most of them distressed.

READ: Access Bank will no longer accept cheques with logo of defunct Diamond Bank

Included in the oil and gas loans was a $66.4 million in loans owed to the bank by Japaul Oil and Maritime, as they were referred to at the time. The loans had gone bad accumulating unpaid interest of about $11.2 million. By the time Access Bank took over the loans, Japaul agreed to a restructuring rolling over both the principal and interest.

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This is typical of most Nigerian companies burdened with debts they cannot pay. To avoid being run over by the bank, the debtors will negotiate a restructuring, extending the loans by one to three years and if lucky, reducing the interest rates. In return, the bank books new fees (which are often paid in advance of the restructuring) and then gets to avoid huge provisioning mandated by the central bank.

READ: Over 1 million people took loans from banks below 20% interest rate in 1 year- CBN

It is often a ‘win-win’ situation that essentially kicks the can down the road until, like in the case of Diamond Bank, the chicken comes home to roost. But Access Bank is not new to slugging it out with debtors, particularly those who do not pay up. Upon takeover in 2019, Herbert Wigwe, the CEO of Access Bank announced that his bank was going to go after Diamond Bank debtors. In an interview in 2019 he maintained that “we recovered N2.2 billion bad debt in the year under review. Access Bank will intensify effort to ensure that it recovers the debt owed to Diamond Bank. We will go out for Diamond Bank’ debtors and if they are not ready to redeem their debt we will publish their names in the newspapers.”

In 2019, Access Bank swooped on Japaul Plc seeking repayment of their Diamond Bank loans which was now about N37 billion. The bank took over Japaul’s trading assets and integral to the going concern status of the company. Before now, Japaul made money rendering marine services, dredging, mining and construction mostly for the oil and gas companies.

READ: Access Bank vs. Seplat: Of subterfuge and corporate brutality

But business has been bad for years now leading the company into net accumulated losses of over N50 billion as of 2018. For the 5 years leading to 2018, the company posted back to back losses with revenues going from N5.3 billion in 2015 to about N85.8 million in 2019. External loans had also ballooned from about N18.8 billion to about N38.8 billion. Its share price had also fallen to about 20 kobo per share by the end of 2019. It was nearing bankruptcy and something had to give.

They began a court battle with Access Bank over the loans and the threat of a liquidation eventually settling for a deal. Sources inform Nairametrics that Access Bank is one of the most aggressive banks in the business when it comes to playing dirty with debtors. Unlike Diamond Bank, Access Bank is ready to battle in the courts and is ready to deploy any legal means necessary to recover their loans even if their actions are viewed as uncanny.

READ: Former bankers who stole from Diamond Bank (Access Bank) get jail terms 

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Recently, the bank obtained a Mareva injunction sealing the offices and taking over the assets of Seplat due to a related party loan owed by the latter’s Chairman, ABC Orjiakor. Just like Japaul, the loans owed by ABC Orjiakor were also obtained from Diamond Bank. According to sources, when Access Bank swoops in for their loan recoveries, they deploy all tactics in the books to ensure all or most parts of the loans are recovered from chronic debtors.

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Eventually, Access Bank and Japaul agreed to settle the matter outside the court. In exchange for repaying the N38 billion loan, Access Bank settled for a repayment of N30.9 billion. The deal involves Access Bank taking over two of Japaul’ s Dredgers (12& 13) for N5 billion and a Barge (Beau Geste) for N25.9 billion. Japaul also gave up its land in exchange for working capital of N1.5 billion from the bank.

READ: Access Bank recover N14 billion in bad loans after merger with Diamond Bank

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In return, Japaul gets to clean up its balance sheet erasing what is left of its debt, booking a profit of about N40 billion and wiping off its negative equity of N35.5 billion. However, in one fell swoop. From negative equity of N35.5 billion, the company’s net assets are now N4.69 billion. A win-win for everyone.

We are not exactly sure what Access Bank plans to do with dredgers and barges it took over from Japaul. Interestingly, in the deal, Japaul also gets to lease back the two dredgers for a period of 6 years from Access Bank for a sum of N1 billion paid annually from 2021 – 2026. Japaul got a one-year moratorium on repayment expiring in December 2020.

READ: Nigeria, other African oil-producing countries will lose $1tn oil revenue in 20 years – PWC

Japaul has since changed its name to Japaul Gold and Ventures citing the dwindling oil and gas sector for its reasons. The company believes gold mining and technology are the future and is seeking to raise N25 billion in equity to pursue this course. Its share price has ostensibly risen by 150% since the turn of the new year, the best performing on the stock exchange.

For Access Bank, aggressively going after bad loans have paid off immensely. In 2019 the bank recovered N38.9 billion in bad loans barely a year after taking over Diamond Bank. In the first 9 months of 2019, a total of N24.7 billion was captured in bad debts recovered. It is a strategy that is working and there is no betting against Access Bank doubling down on aggressive recovery this year.

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Champion Breweries, Raysun deal highlights disclosure shortcomings

Is Heineken taking over Champions Brewery?

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This brewer keeps struggling to win as Nigeria’s beer war rages on

Champion Breweries Plc informed the Nigerian Stock Exchange, last week, via a press release that an insider, Raysun, had purchased about 1.9 billion shares at a price of N2.6 per share.

The disclosure was part of the stock exchange’s requirement that listed companies must reveal deals made by insiders of the company for the benefit of shareholders and the investor community.

That’s about how far the press release went. It did not reveal why Raysun was purchasing? Who they purchased the shares from and why the deal is being consummated? In terms of corporate disclosure, this was a dud.

READ: Analysis: Japaul, Ardova, Champion Breweries; What is behind the deals?

Raysun is the largest shareholder and majority owner of Champions Breweries. Raysun is also an entity owned by Heineken, the majority shareholder in Nigeria Breweries Plc – the largest brewer in the country. Thus, Heineken is an indirect shareholder of Champions Breweries.

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These relationships give this deal enough scrutiny to warrant a better disclosure starting from the actual purchase of shares revealed in the press release.

Here are some contexts;

Champion Breweries shares breakdown

  • Champions Breweries has a total of 7.82 million shares outstanding at the time of this purchase
  • Raysun held about 60.4% shares in Champions Breweries according to disclosure in its 2019 annual report.
  • Asset Management Nominees and Akwa Ibom Investment Corporation own 12.3% and 10% respectively. The rest of its shareholders own about 17.3% or 1,351,954 units.
  • At the current share price of N1.12, Champion Breweries is valued at N10.57 billion by the market.
  • However, Raysun’s purchase of 1.9 billion shares at N2.6 per share (valued at N4.9 billion, almost half of the current market capitalization), now values the company at about N20.3 billion.

READ: Court threatens to sell Ecobank and Union Bank branches

Where did the shares come from? This is a vital question and here is why.

Going by the number of shares they bought last week (24% of equity), they only could have been able to purchase that many shares by buying up all the shares owned by the Asset Nominees (12.3%), all the shares owned by Akwa Ibom Investment Corporation (10%) and another 3% from other regular shareholders.

It could also be that either or both Asset Nominees and Akwa Ibom IC sold part of their shares and then they made up the rest by purchasing some from the market. Why is Heineken, through Raysun, acquiring so many shares? Is there a takeover deal in the offing? Do they plan to merge Champions Breweries with Nigeria Breweries or still keep it as a standalone company? Will Champions Brewery cease to exist if there is a merger or will they delist following this massive acquisition of the shares of their subsidiary?

READ: Champion Breweries gains 32.35% in a week, following Heineken’s indirect acquisition of its shares

The speculation is palpable.

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This is what happens when listed companies refuse to properly disclose transactions involving mega share purchases of this nature. How does a majority shareholder go from 60.4% of shares to 84% and an announcement is not made explaining or clarifying who sold and if this is a takeover bid.

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But investors seem not to mind at the moment, if the momentum of the share price is anything to go by. A 57% year to date gain is a testament to this. It appears investors expect a mandatory takeover announcement to be made anytime soon and are scrambling for the shares ahead of any announcement.

READ: Resort savings raises N4.3 billion, as Camey and Rock acquire majority shares  

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Unfortunately, this is not how markets should work anywhere, and the sooner it stops the better. The Nigerian Stock Exchange has made massive progress with compliance to disclosure requirements and we believe strongly that they will at some point bring Champion Breweries to order and have them disclose all the requisite information about this transaction. Better late than never.

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