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Nigeria’s fintech industry 2020: The growth frontier of the new decade

At a time when technology is disrupting the global financial services industry, Nigeria has not been left out of the change.

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At a time when technology is disrupting the global financial services industry, Nigeria has not been left out of the change. Although a cash-based economy, Nigeria’s financial system has been receptive to the new transformations in the financial system, especially the introduction of technology.

Nigeria’s fintech landscape consists of 210-250 fintech companies, key stakeholders (banks, telecom companies, and the government), enablers and funding partners (i.e., universities and research institutions, investors, incubators, technology, and consumers). According to Frost and Sullivan, Nigeria’s fintech revenue is expected to reach US$543.3 million in 2022 from US$153.1 million in 2017.

CBN seeks standard practice from fintech operators, GTB, UBA, 8 other DMBs record N135.15 billion earnings from e-transactions , Body of Bank CEOs and telcos to meet over USSD charges

Nigeria’s fintech industry continues to evolve on the back of technological advancement and demographic support as 50% of the population is expected to be less than 25 years of age by the end of 2020. Besides, the prevailing financial exclusion has resulted in low access to complex financial products for the masses.

For instance, insurance penetration in Nigeria is estimated at a mere 0.3%. In Nigeria, transactions are increasingly shifting towards mobile with the growing popularity of mobile technology among the population, especially the unbanked. The number of mobile money transactions increased c.14x to 217.8 million as at 9M 2019 from 15.9 million in 2013. Nigeria’s expanding fintech space should be further supported by Nigeria’s remittance market, one of the leading remittance markets in Africa due to the blossoming diaspora in the US, UK, Canada and Europe.

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Nigeria’s significantly under-tapped digital payments industry is poised for significant growth over the next 5 years. A myriad of factors across industry fundamentals, positive country demographics and regulatory support have formed the base of expected accelerated growth for the fintech industry in Nigeria. This expectation has received significant attention from investors which has led to significant investments as existing players look to position for future growth.

[READ MORE: Insurance: Recapitalisation exercise sets consolidation in motion)

Nigeria’s fintech industry saw funding rounds from various global investors in 2019, with Interswitch, a payment platform infrastructure service obtaining equity funds worth US$200m from Visa and Branch receiving funds of US$170m from foundation capital and Visa. Overall, Application Program Interface (API) technology-enabled fintech companies control the funding scenario, reflecting investor confidence in such technology.

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In this report, for the sake of convenience and ease of understanding, we divide the Nigerian Fintech market into two categories; Payments processing and Banking services (lending and savings).

Despite the increasing payment channels available to Nigerian consumers, the digital payments industry remains significantly under-tapped. Payment for goods & services is mainly done with cash. According to the Enterprise Development Centre (EDC) of the Pan African University, cash payment accounted for 95.3% of transaction volumes at the end of 2018.

This compares less favourably with SSA figures of 88.5% cash payments. Nevertheless, we highlight that the volume of non-cash transactions in Nigeria showed a significant improvement from what obtained in 2013 where EDC puts Nigeria’s cash payment at 99.6% of total transaction volume.

Nigeria is poised to lead the growth in non-cash transaction volume. According to the EDC, % of non-cash transaction volume is forecast to grow at a CAGR of c.39.0% over 2018 – 2023e faster than the c.21.0% forecast for Sub-Saharan Africa and global forecast of c.9.0%. Non-cash transaction is expected to reach 17.8% of total transaction volume in 2023 from 4.7% at the end of 2018.

Increasing mobile and internet penetration has continued to climb in Nigeria presenting further opportunity to support online payments. Data from the Nigerian Communications Commission (NCC) puts broadband penetration in Nigeria at 35.1% as at August 2019 (2018 – 31.5%). This is forecasted to climb to 55.0% by 2025 according to Jumia’s mobile market report for 2019.

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The rapidly growing fintech industry is also offering key support to the financial services industry as Nigeria presents a huge market for digitised unsecured loans and Nigeria’s low credit penetration presents significant opportunities. Nigeria’s domestic credit to the private sector (as a percentage of GDP) was 10.9% as per 2018 data, compared to SSA peers like South Africa at 138.8% while World average stands at 129.7% according to data from World Bank.

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Nigeria's fintech industry 2020: The growth frontier of the new decade

We believe Nigeria’s fintech industry can tap the population yet to be financially included. The National Financial Inclusion Strategy (NFIS) of 2012 set targets of 80% (formal and informal) financial inclusion and 70% formal financial inclusion by 2020. As at 2018, only 63.2% of Nigeria’s 99.6 million adult population had access to financial services according to the NFIS strategy document.

[READ ALSO: Top 10 stockbroking firms trade N1.35 trillion on stocks in 2019)

In addition, bank account and mobile money account penetration also remain significantly low though the latter is growing at a fast pace. Mobile money account penetration in Nigeria stood at c.6.0% in 2018 which compares less favourably to SSA average and Kenya with c.21.0% and 73.0% penetration levels respectively. We believe local fintechs exploring the Nigerian unsecured lending business would see strong growth in coming years while new players also come into the industry to tap into the fast-growing sector.

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CSL STOCKBROKERS LIMITED CSL Stockbrokers,

Member of the Nigerian Stock Exchange,

First City Plaza, 44 Marina,

PO Box 9117,

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Lagos State,

NIGERIA.

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Columnists

Recession; proactive measures not cyclical factors can resuscitate economy

The National Bureau of Statistics (NBS) released the GDP report for Q3 2020 which officially confirmed the economy has slipped into a recession.

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FG warns Nigerians about on-going N3million COVID-19 grant scam, IMF, World bank loans, Over 56% of 2019 budget expenditure was released for capital projects , FG changes decision to sell stake of oil assets in JVs, Finance Bill: Nigeria exempts small businesses from Company Income Tax , Finance Bill is for the good of Nigerians – Finance Minister, Zainab Ahmed, Nigeria, five other West African countries reject ‘Eco’ as ECOWAS single currency, FG rejects calls for tax reduction, tax relief for donors to intervention funds, Nigerian economy going into recession, might contract by -8.9% - Finance Minister, Nigeria to spend $33.20 billion in 2021 up 17.2%, will spend 25% of budget on debt servicing - Finance Ministry, COVID -19: FG accesses $750m loans from World Bank for states

Earlier this week, the Minister of Finance, Budget & National Planning, Zainab Ahmed attended the 26th Nigerian Economic Summit and in her presentation highlighted some of the steps and investments the government is making to bring the economy out of a recession. Some of the points she highlighted were; stimulating the economy by preventing business collapse through ensuring liquidity, retaining and create jobs through support to labour intensive sectors such as agriculture, undertake growth-enhancing and job-creating infrastructural investments in roads, rails, solar power and communications technologies, promoting manufacturing and local production across all levels as well as advocating the use of made in Nigeria goods & services. She also highlighted focus on pro-poor spending as a strategy to mitigate the impact of covid-19 on poor households.

We recall that during the weekend, the National Bureau of Statistics (NBS) released the GDP report for Q3 2020 which officially confirmed the economy has slipped into a recession. Following the 6.10% contraction recorded in Q2 2020, the economy further contracted though at a decelerating rate of 3.62% in Q3 2020. We reckon that prior to the covid-19 crisis, economic growth had began to slow with Q1 2020 GDP growth of 1.87% trailing prior 5-quarter average of 2.29% (excluding Q1 2020). The economy has largely survived on an oil-led recovery which we consider cyclical with other core sectors lagging and reeling from the fallout of the impacts of the 2016/17 recession.

In our view, the government needs to be proactive and strategic about policies it intends to adopt to resuscitate the economy. The focus on social welfare, fiat-led interventions in agriculture, emphasis on infrastructure development and advocacy for local manufacturing is reminiscent of prior strategies that can’t be really be considered successful. In our opinion, the economy is in dire need of influx of investments and adequate skill pool to spearhead resource allocation, which we believe can be provided by the private sector. Thus, the public sector should in our view invest in tackling structural issues around ease of business operations (borrowing costs, regulatory & licensing bureacracies/inconsistencies, public agency corruption & FX policies etc.) as well as strengthening regulatory & legal frameworks while the private sector drives the investments for accelerated growth in manufacturing, infrastructural development, agriculture and other core sectors.

In our view, supporting a free market-led economy (given the more organised nature of the private sector than the public sector) would see a return of foreign direct investments into the Nigerian economy while local entrepreneurs would be motivated to take more risks to develop businesses. The outlook for oil prices remain weak and production levels may remain below historical levels as OPEC attempts to keep price stable. Thus, the possibility of a cyclical recovery is limited, only proactive measures to correct long term structural issues would restore the economy on the path of accelerated inclusive growth.


CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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Understanding T.I.N.A. in the Nigerian financial system

As investors face an environment where uncertainty persists, the alternative left will be to park their excess funds in a safe place until Covid-19 passes.

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This week, I want to talk about T.I.N.A….(no not the girl)

T.I.N.A. is an acronym for There Is No Alternative. It is used to describe a situation where the markets have excess liquidity and have no outlet to invest, so they invest in low yielding government securities because there is simply no alternative out there.

The financial markets today are awash with liquidity.

In the US for example, the CARES Act 1 cost an estimated $2.3t (11% of US GDP) including $510b to prevent bankruptcies and $349b in Small Business Administration Loan.

All this cash simply increases the liquidity of the financial system. The US Federal Reserve further lowered rates to a band of 0-0.25% in March 2020, the effect? Rates offered by banks on deposits have crashed.

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Thus investors face an environment where the economy is shut because of Covid-19, and uncertainty persists. The only alternative left to the market is to park their excess funds in a safe place until Covid-19 passes, that safe place being US Treasuries and Bonds.

Thus the Fed and US Treasury can offer the low yielding paper to the market because the market is chasing safety, the investors buy because there is no other safe alternative out there, safety first.

It’s the same in Nigeria, the economy has contracted due to the COVID-19 mandated shut down and also exchange rate and land border closures.

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These issues have strained the economy and have been amplified by falling economic output. As a result, investors are very risk-averse and are not willing to expose their capital to risk, thus they are seeking the safety of the sovereign paper.

(READ MORE: The economy may end up weaker if inflation rate is not controlled – CBN report)

The Central Bank of Nigeria (CBN) faced with a glut of liquidity has done what any prudent banker will do, it has dropped the fees it pays to lenders when it borrows money from them.

Thus the Nigeria Treasury bill rate which is the cost of the CBN borrowing at the short end of the market, (less than 365 days) has fallen.

Take the latest auction of Treasury Bills dates 11/11/2020, the rate now being offered by the CBN for 91day and 364-day paper is 0.0350% and .300% respectfully.

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The low rates to my mind is not a surprise, but consider that the CBN offered to borrow N19b from the market, but received subscriptions from the markets to place N99b, this at 0.0350%.

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Why are investors flooding the Sovereign Debt market with money? Because there is no alternative viz a viz risk and reward.

The Nigerian Stock Exchange All Share Index for instance has fallen from a recent high of 42, 624 in January 2018 to 32, 990 as of the Week ending Friday 20th, 2020.

In essence, the Nigerian investors prefer to book negative real return by holding risk free government paper than take any investment risk by exposing their capital to commercial lending.

(READ MORE: Uber, JP Morgan Chase, Moderna gain, COVID-19 vaccine triggers U.S Stocks Up)

Again this is a normal consequence when there is uncertainty in the markets but the lack for a better word “greed” in the markets has offered the CBN a rare chance to drop rates even in an inflationary environment.

The consequences of T.I.N.A. in the Nigerian financial system is clear.

Low rates will discourage savings, already the Pension Fund Administrators have a decision to make if they will continue to hold a full 8% of their portfolio in a negative-yielding but safe investments. T.I.N.A. also supports the Central Bank of Nigeria’s strategy to force banks to lend to the real sectors.

By dropping the risk-free rates in the economy, the CBN is making a point that there is no more free lunch, rather yield will have to be generated from creating risk assets and earning a return.

This sounds good on paper but the investing environment in Nigeria is yet unchanged positively, new taxes are being proposed, land borders are still shut, wages are still low and falling due to inflation.

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In general, the Nigerian consumer is in a weak state with very low buying power, as evidenced by the sachetization of the consumer space. It will take a brave investor to commit funds, but then again, fortune, they say, favors the brave.

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Traders’ Voice… A recession, for how long?

With the oil sector likely to remain depressed in Q4 2020, expectations of recovery will rest mainly on the future performance of the non-oil sector.

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Recession! I think we all saw this coming. The Nigerian economy declined for the second consecutive quarter by 3.6% YoY in the third quarter of 2020, following a 6.1% drop in the preceding quarter. It marks the 2nd recession in the country in four years amid a significant decline in the oil sector, coupled with the rippling effects of the restrictions implemented across the country in early Q2 in response to the COVID-19 pandemic.

During the Sunday sermon, my pastor made a spirit-filled statement. He said, “it is hard to create sustainable wealth with a shaky foundation.” This statement did not only resonate with me spiritually, but it also did economically. In the case of Nigeria, ever since we shifted all attention to crude oil, it has been one economic struggle or the other. If I start talking about the macro-economic and sociocultural headwinds that watered down the effect of the fiscal and monetary stimulus packages, I would be forced to ‘off my mic’. At the end of the sermon, we were all asked to say this short prayer “Oh Lord, heal my foundation.” I also made the same prayer for Nigeria. However, deep down, I know we will need just more than prayers to address the fundamental issues hindering growth in the economy. The question remains, how long will it take to diversify the economy?

Over the years, huge amounts of investment have gone into the Agricultural sector in a bid to diversify the economy from crude oil. However, the agricultural sector remains underdeveloped and unable to sustain the economy (maybe we need to decide on what sector can really take us to the promised land). Although Nigeria is not the only country that has been gravely affected by the Covid-19 pandemic, I think it is safe to say that the Nigerian economy was already showing signs of weakness following a steady decline in crude oil prices and external reserves.

Just thinking out loud, for a country that is so rich in natural recourses, has a youthful population, favorable weather and fertile land, why do we struggle to generate multiple revenue streams? I guess it is true what they say, “one man’s trash is another man’s treasure.”

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The oil sector recorded a real growth rate of -13.89 percent YoY, driven by the depressed price of crude oil this year. We also witnessed a significant drop in oil production, which declined by 18.13% YoY to 1.67 Mbps, representing its lowest level since the third quarter of 2016, due to compliance with OPEC+ cut agreements.

ICT remains the outperformer in the non-oil sector

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The non-oil sector recorded a real growth rate of -2.51 percent YoY in Q3 2020, which is down by 4.36 percent relative to the rate recorded in Q3 2019, but represents an improvement of 3.54 percent when compared to the 6.05 percent contraction recorded in the preceding quarter. The gradual economic reopening pursued during the third quarter aided the improvement. The underlying subsectors that supported the non-oil sector include Information and Communication (14.56%), Agriculture (1.39%), Construction (2.84%), Financial and Insurance (3.21%), and Public Administration (3.58%).

For how long?

With the oil sector likely to remain depressed in Q4 2020, expectations of recovery will rest mainly on the future performance of the non-oil sector. We expect that the N2.3 trillion stimulus package contained in the economic sustainability plan will play a major role in supporting the recovery of the non-oil sector.

Nevertheless, the economic impact of the #EndSARS protest remains a concern as well.

All eyes are on the MPC meeting…

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The MPC will be holding its last meeting for the year and with the recent macro-economic data (GDP and inflation), market participants will be anticipating the outcome of the meeting more than ever. The MPC will have to decide between further supporting economic recovery or taming inflation. The Central Bank of Nigeria unexpectedly slashed its monetary policy rate by 100 bps to 11.5% during its September 2020 meeting, bringing anchor to the lowest since 2016.

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Inflation vs Interest rate (2015-2020)

*White line… inflation
*Blue line…. MPR benchmark rate

Where is the money?…….

The decision of the MPC will be a major determinant of market direction for the rest of the year. We face three
possible scenarios.

1. Bull case (rate cut): A further rate cut at the MPC will most likely renew interest on the long end of the
curve in the bond market as the short to mid end have received most of the traction in weeks. We will
also witness renewed interest in the equities market after last week’s pullback created possible entry
points.

2. Base case (maintain status quo): The relatively quiet trend will persist in the bond and equities market.
Participants will be looking forward to the PMA on Wednesday where stop rates could print negative.

3. Bear case (rate hike): Although least likely, this would lead to a sharp knee jerk negative reaction
across all financial assets especially in the fixed income market.

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