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.

The expectation and the reality

On July 3^rd 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.

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.

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.

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.

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.

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:

• 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.

• 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.

• 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.

Lagos State thrives as the economic backbone of Nigeria and with its GDP rivaling African nations, it is no surprise that what happens in Lagos, affects Nigeria in its entirety.  

Following the impact of the COVID-19 pandemic, Lagos State had quite naturally reduced its expectations for the year 2020. From a proposed budget of N1.169 trillion, the State reviewed it downwards by 21% to N920.5 billion – out of which it was still able to attain an overall performance of 86%.

Total revenue alone was 93% of projections and this is despite the pandemic, the additional costs of the #EndSARS protests, as well as the other disruptions that followed. As the Lagos State Commissioner for Economic Planning & Budget, Sam Egube puts it, ‘excuses build bridges to nowhere.’  

READ: Oyo State IGR increased by over 26% without increasing tax burden – Gov Makinde

That said, a 2021 budget of N1.163 trillion is nothing short of audacious, particularly considering the revisions made to last year’s projections. Signed into law by the Governor on 31st December 2020, it was prepared to first prioritize the completion of all on-going projects in the State and then to meet a series of objectives from employment creation, increased investment in human capital development, i.e. education and healthcare, deployment of functional technology in public services, amongst others.  

While the budget succinctly themed, “Rekindled Hope” and the many proclamations of the T.H.E.M.E.S agenda are remarkable, revealing a desire to reach for more, there is ardent need to interrogate the sources that make up the budget, what they are projected to be used for, and the possible limitations between the lines.  

READ: FG to create “Special Instruments” as part of plans to formalize its borrowing from CBN

Funding the budget and the debt quagmire  

The total budget of N1.163 trillion is expected to be funded from a total revenue estimate of N971.028 billion, made up of Total Internally Generated Revenue (TIGR) of N723.817 billion, capital receipts at N71.811 billion, and federal transfers at N175.400 billion.  

While the figures for Federal transfers and receipts are said to have been conservative, the breakdown assumes that a key part of the budget is expected to come from the State’s Internally Generated Revenue (IGR).  

During the official budget speech, the Commissioner of the Lagos State Ministry of Economic Planning and Budget had explained that Lagos State Internal Revenue Service (LIRS) performance is expected to increase by 30% in 2021. On one hand, systems such as simpler collection systems are being tightened to boost revenue; on the other, more companies will remit taxes with many tax holidays from 2020 taken care of in the past year.  

READ: FIRS hits 98% of target as it collects N4.95 trillion for 2020 fiscal year

They also expect to harness the huge revenue-generating opportunities in the State particularly in the real estate and transportation sectors while also leveraging data to uncover available opportunities. Following the 21% revision of the past year, particularly with many of the same challenges still at the fore, the assumptions for the projected revenue can really only be proven by their delivery.   

The deficit of N192.494 billion is projected to be funded by a combination of both internal and external loans. Now, while borrowings of N192.5 billion compared to projected IGR of N723.8 billion is relatively fair as the State is projecting to internally generate almost 4 times of its proposed borrowings, the underlying debt challenge of the nation should naturally still cause a few raised eyebrows for the additional debt – even though it is projected to be used in its totality to fund capital projects. The ongoing instability in the FX market, as well as the increasing debt burden this will pose, are some of the main points of consideration with the budget deficit financing.   

READ: PenCom boss queried for spending N5 billion on 380 staff in 8 months

Speaking at the “Facts-Behind-The-Figures Media Roundtable,” Commissioner for the Lagos State Ministry of Economic Planning and Budget, Sam Egbe explained that most of the loans taken will be in Naira in order to protect the State from FX risks as much as possible. The Commissioner of Finance, Dr. Rabiu Olowo, had also explained that the loans to be taken are well within fiscal sustainability levels.   

He explained that “We cannot depend on our own internally generated revenue or the federal transfer that we get from the federal government if we want the kind of development that Lagos needs at this time. For this, there are two main benchmarks that we follow. We have the federal debt management office benchmark of 30% debt to revenue, and of course the World Bank benchmark which is 40%. We closed the year 2020 at 19.8% and for the year 2021. While we project about 22% debt to revenue ratio, we are still within both benchmarks.”  

The deficit financing of N192.5 billion is proposed to be raised through local capital market bonds of N100 billion, external loans of about N55 billion, and internal loans of about 37.5 billion.  

Priority sectorial allocation  

The total expenditure for the year 2021 is broken down into capital and recurrent expenditure at N702.9335 billion and N460.587 billion respectively, a ratio of 60:40. While there could be arguments as to the sustainability of the allocations given the infrastructural gap in the State, there are a few extra-budgetary strategies for funding projects that the government put in place to bridge the gaps.  

Some of them include Private Sector Infrastructural partnerships, bespoke financing terms, and structured (also PPP) critical infrastructure as used for the blue and red rail as well as the metro broadband fibre ring. The argument is that the State can deliver more than can be captured in the budget.  

The allocation breakdown for the total N1.163 billion based on the Classification of Functions of Government (COFOG) also reveals an upward increase in Economic affairs (consisting of Agriculture, Commerce, Tourism, Art & Culture, Energy and Mineral Resources, Transportation, Infrastructure and Waterfront) from 26.55% of the budget in 2020 allocation to 29.35% at N341.4 billion in 2021.  

This implies that opportunities could exist in these areas for Lagosians and international investors willing to produce the value the State requires to meet its objectives. While the sectorial allocation isn’t bereft of limitations as indeed it really cannot solve all the problems at the same time, major considerations should be around its successful implementation and the government’s continued transparency to Lagosians in economic happenings.   

The Nigerian Insurance sector is critical to propelling income equality and reducing the poverty level of any society, but the industry’s performance has continued to drag amid many factors, such as; low underwriting capacity of players, lack of trust by consumers, poverty and the inadequacy of distribution infrastructure.

These factors have jointly contributed to the abysmal level of insurance penetration – the proportion of insurance business to the gross domestic product over the years.

READ: Fintech key to insurance penetration, processing of claims – LASACO MD

The Nigerian Insurance sector remains largely underdeveloped with Insurance penetration still at c.0.5% to GDP. The sector which contracted by 18.67% y/y in the Q3 GDP report released by the National Bureau of Statistics (NBS) is set for a deep recession in 2020.

The covid-19 pandemic effect has increased health, travel, and business disruption claims. These claims, coupled with underwriters’ inability to write risks in Q2 and the tapered household income should amplify the sector’s expected recession.

READ: AXA Mansard divests from its pension and real estate ventures

In a bid to rid the sector of these known drags, the National Insurance Commission (NAICOM), the primary regulator in the industry launched its recapitalization exercise in May 2019. The plan’s proponents intend to improve the industry’s minimum paid-up capital in each business segment, thereby solving premium flight issues that have continued to plague the industry.

Following the lingering impact of coronavirus, the deadline was adjusted from June 2020 to December 2020 to implement Phase I of the project while the deadline for the second phase’s performance was moved to September 2021. Some players have called for an extension of the regulator’s deadline given the impact of Covid-19 on their businesses.

READ: FG seeks partnership with National Council of Registered Insurance Brokers, here’s why 

However, most of the industry’s bellwethers have entirely shored-up their minimum paid-up capital to the required level. In our view, firms that are yet to meet the required capital threshold may likely lose out on the opportunities available on the supply side of the market.

Furthermore, for the industry to thrive, the regulators may also need to deepen micro insurers’ activities in the Nigerian economy.

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.