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Page last updated
February 15, 2003




New Nigeria
Attention to all investment managers

Every sector of the Nigerian economy is bracing itself for the new era around the corner as the country emerges from the shadows of sucessive military regimes to the "normality" of a democratically elected government. The outgoing military leader, recognising that he had inherited a nation troubled by the policies of his immediate predecessor, started by forging new links with the international community. There is however, no doubt that still more is required to properly rehabilitate the battered image of the country.

The future of the Nigerian banking industry is looking brighter once again after the difficulties of the mid 90s when a number of banks were seen to have failed and were taken into administration and/or closed by the authorities, as a result of which a number of responsible executives have served prison terms. Added to this, the CBN had directed all banks to increase their paid up capital to a minimum of N500million. Of the estimated 80 banks still remaining in business, about three quarters are thought to have complied, and they wait to see what action will befall those who have not. The Central Bank of Nigeria’s (CBN) determination to restore the reputation of the banking sector has been further strengthened by the Federal Government moving commercial banking functions on behalf of its parastatals from CBN to the commercial banks.

Recovering from the effects of the distress of the mid 90s, the past three years have seen much restructuring, particularly by the big players who are predominantly commercial banks. The immediate future will be interesting as the coast is now clear (although the CBN indicated clearly that it is not ready for universal banking) for Merchant Banks who wish to convert to Commercial Bank status to do so. The big three (First Bank, Union Bank and UBA) currently amongst them control about 45% of the market but there remain, as survivors, a number of small but strong, aggressive and innovative banks who are well positioned to gnaw away at this market share. Added to this is a new foreign entrant or three and the whole market looks to be poised for a situation that will generally be to the customer’s benefit as a good number of credible banks chase a greater share of what is currently a diminishing corporate pie!

Although it is not yet clear how many of the indigenous merchant banks are seeking to convert, speculation has it that in addition to the likely new entrants to commercial banking from the existing names, a number of major international names are in the wings awaiting the issue of a commercial banking license. These include ABN Amro, Standard Chartered, HSBC and Bank of Tokyo Mitsubishi.

Orientation and focus is also changing at Stanbic Merchant Bank Nigeria Limited, a member of the Standard Bank Group of South Africa (SBSA) (not to be confused with Standard Chartered). SBSA now has more subsidiary business representation in Africa than any other foreign bank group. Given that all these are commercial banks, it would hardly be a surprise if Stanbic in Nigeria were seeking the conversion route. This thought is reinforced when one remembers that SBSA is a leading commercial banking group in South Africa and could bring to bear in Nigeria a wide range of skills and experience on such matters as technology, products, delivery and branch configuration. The recent SBSA/Liberty Life tie up will also give the group a whole range of new strategies and opportunities to eventually migrate to its subsidiary businesses.

The capital market in Nigeria is transforming rapidly with reforms from both procedural and legal background. This sector is also looking forward to a new era post inauguration of a civilian administration in Nigeria. It is noteworthy that the Nigerian capital market, even in the era of very high handed government, progressed so much that it is a totally free market. Some of the major reforms which have taken place and which together have opened up the market for everybody to participate include the repeal of prohibitive laws such as the Nigerian Enterprise Promotions Decree of 1988 and the Exchange Control Act of 1962. These laws were replaced by The Nigerian Investment Promotion Commission Decree and the Foreign Exchange (Monitoring and Miscellaneous Provisions) Decree of 1995. Whilst a degree of control still exists through these acts, it is the word control not prohibition that is now uppermost in the potential investor’s mind.

Another major development was the establishment of the Central Securities Clearing Systems (CSCS) in April 1997. The CSCS has been very exciting to foreign portfolio investors, but surprisingly had received mixed reactions from local players. Be that as it may, it is now a generally welcomed development. The capital market is continuing to show surprises, the trading system which is currently open-outcry call over and floor system is set to go electronic. In the almost 38 years since the establishment of The Nigerian Stock Exchange (NSE), the growth of the market has been generally sluggish with market capitalisation still only around $3billion, a relatively small amount when compared to other markets of the same vintage.

The absence in the market of access to key economic sectors such as public utilities, mineral, oil and gas resources is felt to be one of the factors behind this sluggish performance. These sectors are guarded by government as currently they are state owned. Coupled with this is the predominance in the oil and gas sector of foreign equity investors who are active owner/ managers rather than portfolio investors. All of the foregoing have affected the depth and liquidity of the equities market making it less attractive to foreign portfolio institutions and fund managers.

As a result of the experiences of these foreign investors in places such as East Asia, South/Central America and Russia, Africa has once more come into focus and Nigeria, of course, is a country not to be ignored despite all its problems, real and imagined. The market has provided attractive returns for those who have been brave and confident enough. Companies and their management have become pro-active and generally good corporate results have followed, especially in the financial and brewing sectors. As a result, stocks in the popular sectors are not generally available. It is hoped that this will soon change as the on-going (?) privatisation and deregulation policies give the private sector a more leading role in the economy.

In all, the emergence of Nigeria into the league of democratic nations of the world, consistent economic policies and the various reforms of foreign exchange policies and the capital market against a back drop of some distress still attaching to alternative emerging markets will bring Nigeria further forward in the minds of international investors.

One area which will reinforce the confidence of the international community, most importantly prospective investors in Nigeria, is the availability of custodian banking services. Custody will, without doubt, be an area which will equally affect decision making as to whether Nigeria is a sound investment market or not.

Custodial services, whilst available, are still fairly new, pioneered in Nigeria by the Standard Bank Group of South Africa. The business was started in 1995 to service the SBSA group’s global custodian customers following exemption granted by the United States of America Securities and Exchange Commission under rule 17-F5. Currently, custody is provided as a “hub” service through SBSA’s subsidiary, Stanbic Merchant Bank Nigeria Limited (“STANBIC”) which is the only provider of a custody service in Nigeria.

The service has acted as a confidence builder for foreign investors who are able to use the bank for settlement of trades, remittance of dividends, sale of financial assets and other corporate actions. The SBSA Group is believed to have also given its local subsidiary the go ahead to expand this product to offer a parallel service to domestic investors. The parent has provided further support by way of enhanced technology. The Nigerian Stock Exchange (NSE), the Central Securities Clearing System (CSCS) and the Securities & Exchange Commission (SEC) welcome this move and are actively encouraging the bank in its efforts to introduce its custody service to local institutions.

It is felt that the introduction of a local custodian function will assist in eliminating the level of errors currently seen in what is largely a manual process, thus reducing the transaction cycle and the need for corrective dialogue between brokers and the CSCS. This, in turn, will give the market a further chance to firm as possible new procedures evolve which will hopefully lead to improved shareholder confidence as a result of the shareholders’ register becoming a less cumbersome process to maintain.

There are three main functions in the custodial field, it is hoped that all will see growth in the run up to and beyond the inauguration of a civilian administration in the summer of 1999. These functions are:

As Sub-agent for global custodia banks.

As a custodian for domestic brokers and institutions who deal regularly in the local market.

As a custodian for international broker dealers or as a direct custodian for foreign institutional investors.

Stanbic is in a unique position to benefit from Nigerian custody business, although as barriers to entry into this business appear to have been relaxed by the United States authorities the attention of other players cannot be ruled out. However, foreign investors entering a market like Nigeria are more likely to use one of the established, usually American, global custodians, with whom SMBN has existing agreements or is already acting for, as local custodian through the hub service; acting as custodian for foreign global custodians will remain for some time the major source of business for any local custodian.

The reopening of Nigeria as an attractive market for foreign investors offers opportunities, only dreamt of during the more difficult years of the military regimes. It is important that the return to democracy is peaceful and sustainable. Given the stabilities that will hopefully arise from a successful transition, Nigeria, as one of the three biggest economies and with the biggest population in Africa should be on the shopping list of all investment managers.


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