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Columnists

How the United States plans to control the African Development Bank

An illustration of the new cold war that the United States and China are waging within institutions and international donors.

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e-Learning Platform, Africa Development Bank. AfDB develops Index to aid women empowerment , African Development Bank awards $1.1 million to boost food production in Africa , AFDB increases capital to $208 billion in bid to secure Africa’s future , African Investment Forum: AfDB eye $67 billion deals , ECOWAS backs Adewunmi Adesina’s re-election as AfDB election nears , AfDB bows to pressure from U.S., orders an independent probe of Akinwumi Adesina, Fitch rating agency affirms AfDB's AAA rating with stable outlook, Digital Nigeria e-Learning Platform registers 16,000 users in 24 hours - African Development Bank

The economic and trade war between the United States and China is opening up front lines in Africa. After openly neglecting the continent at the start of Donald Trump’s mandate, the US administration is working hard to block Chinese expansion and regain abandoned market shares. This is a strategy developed by the shadow advisers of the American president since 2017.

In this fight, the takeover of financing levers on the continent is a priority for the Americans, with the African Development Bank (AfDB) as a major target. In this context, is its president Akinwumi Adesina a pawn to be released?

*Adesina, a stone in the shoe of American influence?*

Engaged in a lip-service campaign to win a second term at the head of the African Development Bank at the end of August, Akinwumi Adesina has been plunged into the heart of a fight that is beyond him. Of course, the Nigerian remains the only candidate for his own succession. And even if he can avail himself of the support of the African Union, he will not obtain the easy victory that everyone promised him, essentially due to the economic and commercial rivalry between the United States and China raging across Africa. In this fight, to control the decision-making and financing levers on the continent, the AfDB, and therefore the president who directs it, are major issues for the American camp.

READ MORE: Here is what Akinwunmi Adesina said about allegations against him

*The Trump administration’s strategy of winning back?*

Since coming to power in January 2017, Donald Trump has seemed to ignore Africa. So far, the American president has received only two heads of state from the continent at the White House. This is unprecedented. Worried about the omnipresence of Beijing on the continent and the loss of Washington’s economic influence on the ground, beginning in 2018, the advisers of the Trump administration concocted a strategy of reconquest to counter China in Africa .

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*A slow work of persuasion begins with regard to the American president and turns into obsession in the ranks of the neoconservatives*

Ironically, the offensive was designed and led from the start by the hawk John Bolton, then-National Security Advisor

The American conservatives are very worried. From 178 billion dollars in 2016, the volume of trade between China and Africa reached 186 billion dollars in 2018, and exceeded the symbolic mark of 200 billion dollars in 2019. Even if the objective announced by Beijing in 2014 to aim for 400 billion dollars in trade by 2020 is proving unrealistic today, the inexorable and rapid upward trend in trade between China and Africa is irreversibly written.

This is quite the opposite of trade relations between the United States and the continent.

READ ALSO: African Development Bank joins Nasdaq sustainable bond network

*Attack through commercial means*

The cornerstone of the American trade strategy on the African continent, the AGOA (law on growth and opportunities in Africa) has a poor record for its 20 years in 2020. Launched in 2000 under Bill Clinton, AGOA offers duty-free entry into the American market for 6,500 African products (petroleum, agricultural, textiles, handicrafts, etc.). Thirty-nine predominantly sub-Saharan countries benefit from it. AGOA goals? Help diversify trade with the continent and promote industrialization in sub-Saharan Africa.

However, petroleum products continue to represent two thirds of American imports. According to USAID figures, bilateral trade between the United States and the United States quadrupled from 2002 to 2008, to reach 100 billion dollars. But Africa trade is crumbling. It fell to $ 39 billion in 2017, only to rebound slightly to $ 41.2 billion in 2018, mainly due to the United States’ energy self-sufficiency.

Meanwhile, over the past five years, US exports to sub-Saharan Africa have stagnated on average at $ 19 billion per year. With $ 54 billion in foreign direct investment in Africa, the United States is still ahead of China in this area.

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However, Chinese domination in Africa is a snub for Uncle Sam. Little by little, advisers will convince the American president to look beyond the borders of the United States. The Vice-President of the Center for Strategic and International Studies (CSIS), Washington, and the President, of the Sub-Saharan Africa Advisory Committee for the Export-Import Bank of the United States United (Exim), Daniel Runde, among others, feeds the Trump administration’s perspective on the economic engagement of the United States in the world, in particular in terms of development.

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READ ALSO: AfDB agrees to the review of ethics committee’s report on Akinwumi Adesina

*Go through development institutions, including the AfDB*

Countering China in Africa, by relying on development institutions, has become an end in itself. In a memo titled “The Trump Administration Will Eventually Lead the Bretton Woods System,” Daniel Runde wrote in mid-2017 that “the United States will seek to have a say in the upcoming appointments of the heads of the multilateral banks of development.

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In October 2017, Steven Dowd, the current Executive Director of the AfDB who is the representative of the United States at the Bank and the chairman of the audit and finance

committee of the pan-African bank, confirmed this desire. “I will leverage the US financial contribution to the bank to ensure that it is best used for Africa and serves the interests of US foreign policy there.” […] I will endeavor to open Africa to American investments and know-how.” This close friend of Daniel Runde then made the promise to American senators in order to get the post with the AfDB.

In October 2019, Daniel Rundee, a Republican loyal to Donald Trump, specified the interest of the Americans in controlling the AfDB to halt Beijing’s long march on the continent. “The AfDB is an alternative to engaging in Africa that is not led by China and it can help reframe Africa as a tremendous economic opportunity. ”

In a charge against Adesina carried in a column on the American online site ‘The Hill’, the message is clear. The writer, Daniel Rundee led a charge against the management of the bank by Akinwumi Adesina, its president. Runde insisted on his lack of transparency and his support for authoritarian regimes, in particular by organizing the AfDB’s annual meetings in Malabo (Equatorial Guinea), in June 2019. “Anyone who has read the classic book Tropical Gangsters will recognize that the government of Equatorial Guinea is probably one of the most corrupt in the world”, asserted Daniel Runde.

The offensive had already accelerated following the appointment of Tibor Nagy in July 2018 as US Assistant Secretary of State for African Affairs, a post left vacant for several months. On March 3, at the United States Embassy in Kinshasa, he began his speech on what “the Trump administration in Africa should do: counter China’s narrative and clearly show that the breadth and depth of the United States’ engagement in Africa is second to none.”

On the ground, Tibor Nagy could count on the rebirth, in May 2019, of the Export-Import Bank of the United States (Exim) chaired by Kimberly Reed, a lawyer who served as senior advisor to the Secretaries of the United States Treasury in 2004. Congress gave a mandate to the federal agency, which now has a theoretical strike force of $ 135 billion. It is up to the Exim to devote 20% of its resources to unlocking financing that is capable of neutralizing Chinese offers in Africa. On May 14, 2020, the board of directors of the American agency validated a loan of 4.7 billion dollars for the benefit of Mozambique to build an LNG installation. “This is a prime example of how a revitalized Exim, thanks to the leadership of President Trump and bipartisan support from Congress, can help ensure the use of made in USA products and services, without giving way to countries like China and Russia, ”said Kimberly Reed.

*From 2018, a tool called Prosper Africa …*

In addition, when John Bolton presented the US Strategy for Sub-Saharan Africa in December 2018, he took the opportunity to launch Prosper America. This initiative, which brings together the resources of more than 15 American government agencies, is intended to counter the new Silk Road (Belt & Road), traced by Beijing since 2013, with the mission of doubling trade and investment between United States and Africa. Prosper America is establishing a one-stop-shop to make it easier for US businesses to access more than 60 business investment support services.

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However, the initiative is slipping. “It has lost a lot of its momentum due to a very slow deployment,” said Judd Devermont, Africa program director at CSIS last June.

READ MORE: Recession: Nigerian economy to slide by 3.4% in 2020 – IMF

*… Followed by the Build Act*

Another brick laid by Congress in March 2018, is the adoption of the Build Act, which created the US International Development Finance Corporation (IDFC), and the American development bank, with $ 60 billion in investments compared to $ 29 billion for its predecessor. Concretely, the Trump administration is also seeking to score points by dealing directly with states. Washington is therefore trying to sign a free trade agreement with Kenya at all costs. Negotiations are underway. After the one concluded with Morocco in 2004, it would be the second time that the United States would ratify and conclude a deal with a country on the continent. The example would be symbolic of the return of Uncle Sam. In 2019, Kenya imports from the United States totaled 391 million dollars, against more than 3 billion from China. In the minds of the Americans, an agreement with Kenya would serve as a springboard for negotiating new agreements bilaterally with other states.

But Washington’s neoconservatives are convinced that the United States can only effectively curb China’s stranglehold in Africa if it controls the major levers of financing on the continent, such as the AfDB, which approved more than $ 7 billion in commitments in 2018 and which benefits from the remarkable triple A rating from international rating agencies.

*Final objective: control the funding levers with candidates dubbed by Washington*

Is the statutory designation of a new AfDB president in 2020 a dream opportunity for Washington to maneuver and control the Pan-African institution and promote the appointment of a president committed to American interests? Except that Akinwumi Adesina stands in the way of Washington advisers. And he is the only candidate to run for his own succession. In addition, he is a national of Nigeria, the largest shareholder of the AfDB with 9.1% of the bank’s capital. With 6.5% of the shareholding, the United States comes “only” in second position.

Whatever. The bank has 80 shareholder countries, including 26 non-African countries. Daniel Runde openly contests the governance of the AfDB which gives the voting preeminence to African countries, with “58.89% of the votes”.

However, in October 2019, the Republican in a note from the CSIS on the future role of the AfDB, said “at the World Bank, the United States has 15.7% of the vote and a de facto right of veto, while they do not hold a veto similar to the AfDB”. One thing is obvious for the adviser: “Regional development banks work best when they follow the golden rule, namely: whoever owns the gold sets the rules”. Clearly, those who finance designate the kings and commanders.

READ ALSO: African Development Bank to launch African Economic Outlook 2020 Supplement

*Obstacles on the way to the AfDB’s capital increase*

As luck would have it, this pressure from the United States came when Akinwumi Adesina was negotiating the Bank’s general capital increase, which was concluded favorably in October 2019, and will raise capital from $ 93 to $ 208 billion over ten years from 2020 to 2030. This represents an increase of 125%. At the same time, Daniel Runde writes: “Shareholders are going to have to ask serious questions. The United States, as the main donor, does not have the same vote and influence within the AfDB as it does in other multilateral development banks,” such as the Asian Development Bank and the Inter-American Bank of development. “The AfDB should reconsider the position of its large non-regional shareholders, who are increasingly speaking out about the disproportionate voting power they hold in relation to the size of their contributions. If they are ready to pay, they should have more actions to take in the bank. ”

Obviously, the United States did not succeed. Did Akinwumi Adesina reject them? Did he stand up against American design? Hard to say. For the moment, the protagonists remain walled in silence. But this is where the troubles of the AfDB President began.

*In the wake of whistleblowers alleging unethical behavior*

To strengthen the attacks against Adesina, the architects of the Nigerian destabilization operation took the opportunity of a letter sent to the governors of the Pan-African bank in January 2020 by whistleblowers. The latter accused Akinwumi Adesina of unethical behavior, favoritism in appointing Nigerians to senior positions, and personal enrichment. Allegations he denies. In the meantime, the grievances against the president of the bank were leaked to the press, giving a global echo to the accusations against him, while he was engaged in the campaign for his re-election. Conservative Steven Dowd, the current US chairman of the AfDB’s audit and finance committee, is suspected of being behind the leaks over the accusations affecting the Nigerian.

On May 5, an internal bank investigation exonerated Akinwumi Adesina for lack of evidence. Annoyed, the United States threw a stone in the pond. In a letter dated May 22, US Secretary of State for the Treasury, Steven Mnuchin, expressed “serious reservations” about the findings of the investigation. And as a member of the Board of Directors of the AfDB, he calls for “a thorough investigation of these allegations by an independent external investigator”. After 15 days of silence, the Board of Governors of the AfDB accepted, on June 5, that a new investigation be “carried out by a neutral, honest person, of high caliber with undeniable experience and a proven international reputation, in a period of two to four weeks at the most, taking into account the electoral calendar of the bank. This mission was entrusted at the beginning of July to the former Irish president Mary Robinson.

*Suspense as to the outcome, but the battle will leave its mark*

Whether cleared or accused, what will be the fate of Akinwumi Adesina, under the threat of the American steamroller? Washington has meanwhile garnered support from Switzerland, as well as Denmark, Sweden, Norway and Finland, according to Bloomberg. The Nigerian still enjoys the backing of the African camp and the rating agency S&P Global Ratings. While maintaining that AfDB’s triple A rating, S&P stated in a press release dated June 19, 2020 that “the Board of Governors of the AfDB endorsed the conclusions of the ethics committee which exonerated the president of any wrongdoing, although it allows for an independent review of the report given the differing views of the Governors. We believe that, in accordance with our expectations, this issue has been dealt with appropriately through the appropriate institutional channels. […] We expect shareholders support to remain strong, regardless of the outcome of the independent investigation.”

Asked by the BBC on May 30, 2020, Nancy Birdsall, senior associate at the Center for Global Development, an Anglo-Saxon think tank, predicted that “the US Treasury would seek a form of discreet compromise in which no one loses face”. The end of the suspense is expected in a few weeks.

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Repositioning the Nigerian Power Sector

The Nigerian power sector continues to grapple with the age-long problems that have plagued the sector even before the privatisation exercise.

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Abuja, Ikeja Discos top list in collection efficiency in Q1 2020- NERC, Estates in Lekki increase electricity tariff to N105/kWh, Eko Electric, Ikeja and 5 others to face NERC sanction for non-compliance, CBN reveals framework for financing National Mass Metering Programme (NMMP), Nigeria ranks eight African country with well-developed electricity regulatory frameworks, as Uganda tops.

A Punch newspaper report says Nigeria lost an estimated N20.5bn in 22 days (January 1 and 22, 2021) due to continued rejection of electric power by the electricity distribution companies (Discos) who in turn argue that it makes no business sense to wheel power to locations where consumers show an unwillingness to pay for the electricity they receive.

Some stakeholders have defended the discos’ actions by arguing that some of the power generated are allocated to areas with little or no revenue prospects, particularly areas where power theft is more common.

This leaves the discos with no option but to reject some of the load to avoid running into further liquidity issues. The news report further stated that a total of 1,941 megawatt-hour of electricity was restricted during the review period due to insufficient gas supply, as well as lack of distribution and transmission infrastructure.

The Nigerian power sector continues to grapple with the age-long problems that have plagued the sector even before the privatisation exercise in 2013. Insufficient gas supply, weak transmission infrastrusture, absence of cost-reflective tariffs and poor metering system have remained largely unresolved. On the demand side, the final consumers have continued illegal actions of meter bypass and in many cases have accumulated unpaid bills.

Granted, among the uncaptured consumers, there are those without access to the national power grid, particularly in rural areas, however, the wide disparity between registered consumers and estimated number of households today suggests that power theft in Nigeria is not on a small scale, and this could be contributing meaningfully to the liquidity issues gripping the power sector value chain.

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Tackling the liquidity constraints of the power sector remains at the forefront. Among suggestions to achieve this is structuring the activities in power sector as financial products for capital market transactions in a bid to facilitate the required liquidity, deepen private participation in the sector and enhance transparency in the entire value chain of electricity generation.

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Local content – A driving force for African oil and gas sector sustainability

There is a wave of change coming and COVID-19 is the first of the determinants that oil and gas investment will gradually be reducing.

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How Libya and Iran can add to Nigeria’s woes

With 2020 being a year of uncertainties in the oil and gas sector and some of the decisions, activities and market trends that took place last year, I reflect on what some of the activities pre-COVID-19 and now means for the African energy sector.

Following the reform of the African Petroleum Producers’ Organisation (APPO) Fund, I was opportune to witness the equally newly reformed Africa Energy Investment Corporation (AEICORP). The AEICORP is to provide “a Solid Capital Base and Liquidity Profile, a Preferred Creditor Status, Developmental Impact, Strong Financial Performance Returns to Investor,” for investors to participate in a low-risk pan-African growth.

With one of the objectives of APPO seeking to ensure member countries cooperate, I believe for African countries to reap the maximum benefits from oil and gas, investment in energy technology through institutions like AfDB and AEICORP will help to achieve this aim. The thought of African investments in the hydrocarbons sector takes my mind to a familiar place – de-carbonization of fossil fuels, as opposed to abandonment.
De-carbonising fossil fuels through technology developed by Africans might take a while to embrace but it is worth the long-term investment. At the moment (or for the next 20 years), Africa is not ready for zero-carbon emission energy sources. Almost all of the oil-producing countries on the African continent depend on revenues from oil and gas to fund their budgets and keep their economy moving. It cannot be denied that the energy security of Africa is highly dependent on decarbonisation.

This is because most of the African countries export their crude to countries abroad and the countries abroad are moving towards adopting the terms of the Paris climate accord which aims to see low carbon emission.
New discoveries of oil and gas are still being made daily with a large part of prospective areas still underexplored. All the countries on the continent cannot boast of 24 hours steady supply of electricity. The West is embracing decarbonisation because they have gotten to a stage where all of the basic social amenities are working, Africa isn’t there yet.

Africa looks to be one of those who will suffer climate change the most. We cannot follow the same paradigm as the advanced countries and we will take a longer time to achieve what they will achieve. The COVID-19 pandemic is a trigger for many African countries to begin to gradually embrace diversification and invest in other sectors of their economy. If African countries do not fully depend on the revenues from oil and gas, we can begin to talk carbon decarbonisation. For now, it is a gradual process and we still have a long way to go.

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The West will not come and save us. The West will save the West and Africa should save Africa. In November 2019, the European Investment Bank (EIB) announced that it will no longer grant loans for crude oil, natural gas and coals project from January 1st 2022, with a few exceptions for gas projects. Also, in October 2020, the United Nations asked world’s publicly funded development banks to bring their lending policies in line with the Paris Agreement, and a few weeks later, many of the institutions including the African Development Bank Group (AfDB) said they will reduce investment in fossil fuels related project.

This is to show that it would soon be every investor for themselves. And if China follows suit, the African market will break.

When all of these lenders stop funding fossil fuel projects in the country, most African countries will have little or no advantage when it comes to negotiations. Chinese authorities have been big players in the development of oil and gas resources in Africa and one of the biggest lenders to African countries. If by 2025 that all of the world’s publicly funded development banks would have joined the EIB in halting the disbursement of funds for fossil fuel projects, an indication that they are only willing to do embark on projects that are in line with their net- zero commitments, China will be the only option left.

Many African countries have already signed agreements that will see them forfeit important state-owned assets if they fail to meet up on their repayment plan for loans obtained from China. Let us not forget that China is also a signatory to the Paris climate accord. So if in the future, China decided to also stop funding fossil fuel projects, most of our countries in Africa who do not start planning for the unexpected now will be left with a wrecked economy and with no option than to forfeit out of the little they have to pay their debts.

French Group, Total, ‘totally’ dominates the oil and gas sector in some African countries. What happens to us when Total pulls out its resources and stops funding fossil fuel projects, because being a French company, it is one of the companies expected to fully commit to the terms of the Paris Agreement?

Is the Africa Continental Free Trade Agreement (AfCFTA) the saviour?

Yes, we do have a genuine opportunity through the AfCFTA. The AfCFTA was formed in 2018 to eliminate tariffs on intra-African trade, to make it easier for African businesses to trade within the continent and cater to and benefit from the African market. It creates a single market for goods, services, facilitated by movement of persons to deepen the economic integration of the African continent, under the Pan African Vision of an integrated, prosperous and peaceful Africa. The benefits are:

To improve the intra-African trade landscape and export structure;

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  • To create a sound global economic impact;
  • To develop better policy frameworks;
  • To foster specialisation and boosting industrialisation;
  • To strengthen regional and inter-state cooperation;
  • To increase employment and investment opportunities, as well as technological development;
  • To provide the opportunity to harness Africa’s population dividend.

In a few years, the AEICORP and AfCFTA may, alongside a few lending bodies and China, be the only creditors willing to invest in the African energy scene. The continent needs to embrace its own Funds and platform and invest in technology in the African energy scene, in preparation for the future of the oil and gas industry.

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One of the solutions to energy security is for African countries to make a case for themselves. Why is the West ignoring the gas sector, which is cheaper and safer and the least-polluting fossil fuel to a more expensive and less reliable source like renewable energy? If African forces start to condemn the decision of these lenders to stop financing fossil fuel projects, under a uniform voice and umbrella body like APPO, negotiations will take place and better resolutions that will favour all parties can be reached.

Countries with huge natural gas reserves such as Nigeria, South Africa, Tanzania, Algeria, Ghana, Equatorial Guinea, Ghana, Senegal, Cameroon etc. should follow in the footsteps of Mozambique and attract investors to invest in that sector. Equatorial Guinea also has projects lined up for its ‘Year of Investment’. Egypt has also been investing heavily in the gas sector and alongside Mozambique, it would become one of the biggest players on the continent, in a few years.

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African countries can also take advantage of the fact that an African, H.E Mohammed Barkindo is the Secretary-General of the Organisation of Petroleum Exporting Countries (OPEC) to lead negotiations in ensuring that fossil fuel projects are still catered for by lenders.

Countries on the continent should also trade between themselves in the areas of energy. It is remarkable what the East African countries are doing together to ensure electricity supply in each other’s countries. Last year, Nigeria also announced it will be importing Niger’s surplus oil. African countries need to get from Africa what is present in Africa. This is the way by which we can help the cause of the AfCFTA, APPO, and each other to reach our full energy potentials and have adequate energy security.

There is a wave of change coming in the world and COVID-19 is the first of the determinants that oil and gas investment will gradually be reducing. African countries cannot afford to buy this change yet. We cannot afford to compare ourselves to the West as we lack what they have, and yes, we have some of the fossil fuels that they still want before their full switch to renewables. We have to take advantage of that gap and reach an agreement that favours all.

It will be great to see the terms of the Paris Climate Accord come to pass in the future. But for now, Africa needs the financing and investment in technology will help to still keep to the terms of the Accord while investing in the huge oil and gas potential here.


About the author

David R. Edet is an oil and gas expert, serving in the capacity of Business Analyst at Afric Energy Ltd, an Oil and Gas Company operating from Nigeria. Mr. Edet is a leading voice to youth involvement in African energy matters and campaigns for more involvement of local contact in the African hydrocarbons sector.

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What banks can do to improve Real Sector Lending in 2021

To navigate the nation’s economy from oil, banks will have to pay more attention to real sector lending in 2021.

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net interest income, Nigerian Banks, Fitch, Nigerian banks tremble over Cyber attack, Most Nigerian banks are very likely to fail stress tests should the economic downturn persists and deepens, What Banks can do to improve Real Sector Lending in 2021

The beginning of the financial year for Nigerian Banks has become a comparison of which bank closed with the largest balance sheet for the previous year; a simulation of which one of the tier-1 banks would outdo the others in the $1billion dollars profit pursuit, and which bank would pay the most dividends to its shareholders.

Every so often, financial analysts employ the use of important indices to decipher areas where these financial institutions need to shore up their numbers and employ their resources to align with the fiscal and monetary policies of the government. These Analysts are usually ignored. Consequently, is the poor policy implementation of the CBN and an ever-widening chasm between the fortunes of Nigerian banks and the economy in which they operate.

A major area where most analysts have faulted Nigerian banks in recent times is in lending – lending to the real sector of the economy.

READ: Nigerian LDR policy weakens banks’ balance sheets, IMF says

The expectation and the reality

On July 3rd 2019, in a letter to all banks, the CBN through its Director of Banking Supervision announced “REGULATORY MEASURES TO IMPROVE LENDING TO THE REAL SECTOR OF THE NIGERIAN ECONOMY”. A laudable directive that was to see banks maintain a Loan to Deposit Ratio (LDR) of 60%, wherein SMEs, retail, mortgage and consumer lending would be assigned a 150% weight in the computation of this LDR, and stiff sanctions of additional CRR of 50% of the lending shortfall will be levied against unyielding banks.

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This regulation fuelled the expectation of substantial gains in the real sector given the relative availability of funds. Banks jostled and made a show of dishing out these loans, but as records of CRR debits for LDR failure began to hit the news, it became apparent that most banks were still stuck in their reality of doing business in Nigeria.

READ: How digital transformation will impact Nigeria’s projected $8.79 billion economic expansion

The reality being that Nigerian Banks have managed to stay amongst the most profitable banks in Sub-Saharan Africa while largely ignoring the real sector. A review of the earnings of 10 top Nigerian Banks between 2009 and 2019 showed that a sizable portion of their profit growth came from non-client driven activities, even as income from core banking activities of these banks shrank from accounting for 85% of their profits in 2009 to 65% of their increasing profit in 2019.

Perhaps this goes a long way to explain the 2020 H1 profits posted by these banks amid a pandemic and looming recession.

READ: CBN issues framework for QR payments

A case of once-beaten?

In fairness, Nigerian banks already got their fingers burnt in the real sector oven once before, and the existence of AMCON is a constant reminder of this fact. The Banks’ attempts to adhere to the new regulation most likely contributed to a rise in the industry’s NPL in H1 2020 notwithstanding CBN’s best intentions with the loan restructuring freedom banks were given to protect themselves from the crippling effect of the pandemic. There doesn’t seem to be a way out for Nigerian banks.

READ: CBN debits N499 billion from accounts of 12 banks for failing to meet lending targets

Navigating the waters of necessity

With all the modernization around the banking process, banking at its root has remained unchanged over the centuries. It still entails receiving from areas of surplus to fix deficits. The real sector of the Nigerian economy has been in severe deficit as the nation directed its attention, and finances, to the oil sector which has been the sustenance of a potentially diverse economy like ours for far too long.

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If Nigerian banks are to navigate the nation’s economy from oil before the rest of the world completes the move, then they will have to pay more attention to real sector lending in 2021. This can be done through the following:

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  • Understanding the necessity

Real Sector lending should no longer be viewed by banks through the lens of meeting regulatory requirements only, their importance to the Banks’ balance sheet should be understood. In the near future, it is unlikely that banks will be unable to earn as much from derivatives as uncertainty caused by the pandemic continues to cause spectacular swings in some markets coupled with a wider acceptance of crypto over fiat which may shrink some markets.

Also, further ignoring the real sector market by commercial banks inadvertently means that Fintechs and their MFBs continue to ramp up the profits in these markets, and may someday be big enough to compete favorably with the commercial banks. Mergers and acquisitions will hasten this process.

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READ: Analysis: Access Bank’s valuation highlights merger blues

  • Having an action plan

As an action plan, real sector lending (not just the creation of risk assets) should be incorporated into the KPIs of relevant members of staff. Also, the banks should actively pursue sectors of the economy where they have comparative advantage by virtue of their expertise, customer base, technological advantage and/or branch network.

  • Using segmentation

Too much emphasis has been placed on “value chain” making banks feel the need to play in all aspects of a business. They practically provide funds for all aspects of the same business- from manufacturing to distributorship. Whilst an argument could be made on the need for synergy and the relative ease of monitoring value chain businesses, this type of concentration of funds puts banks at higher risk of loss when a part of the value chain defaults. However, focusing on a segment of a business could have its own benefits in limiting exposure.

READ: Understanding the deregulation of the downstream Oil and Gas sector in Nigeria

  • Revisiting VC, PPP and Loan syndication

Perhaps the next big business will not be a conventional textile mill nor will it be distributorship of FMCGs. Nigerian banks need to have a foothold in the businesses of the future by adopting VC models of investments and fundraising for these business ideas. Public-private partnership and Loan syndication should not also be limited to development of social amenities but to funding businesses in the real sector.

The real sector lending drive of the CBN has shown promise since inception, increasing the level of industry gross credit by N829b in its first few months between May and Sept 2019. The introduction of the GSI by the CBN from August 2020 is also a step in the right direction to protect banks from an increased default rate of personal loans.

Nonetheless, these policies will not upturn the Nigerian economy if Nigerian banks continue to treat real sector lending as an occupational hazard rather than the occupation itself.

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