Between 2003 and 2008 the Nigerian banking sector experienced its own boom. Nigerian bank assets (according to BankScope data) went from USD 18.6 bn in 2003 to USD 84.2 bn in 2008, but have since fallen back as a result of the significant debt crisis experienced in 2009 (where the Central Bank of Nigeria exposed approximately ~ USD 10 bn in bad debts) across the sector Spurred on by the high valuations several Nigerian banks established operations across the continent with impressive speed. Making money from them will be more difficult.
Making money from new operations in new geographies has not been easy in Africa. Standard Bank of South Africa, acquired the African operations of ANZ Grindleys in 1993 and has only achieved healthy levels of profit when those operations have been transformed into large scale retail operations through subsequent acquisitions. And Stanbic (as Standard Bank is called to avoid confusion with Standard Chartered Bank), had it easy as it was able to follow the rapid expansion of South African corporate across the continent following South Africa’s democratic transformation in 1994.
Most banks that have expanded globally through establishing small green field operations, have done so to support or with the support of their home country corporate base. Nigeria banks have no such luxury, as Nigeria lacks a large number of home grown multinationals that can be relied on to support fledgling banking operations.
One of the challenges is the tiny size of many of these markets. Regulators are increasingly requiring that banks operate as subsidiaries, and thus need to have a full corporate structure regardless of the size of the operation. Just flying directors between countries to attend board meetings can become a significant line item on a small bank’s income statement.
Pan Africanism may be in the buy line of several banks, but intra-Africa trade remains limited except in East Africa. Even then the statistics probably under estimate the extent to which intra regional imports and exports, end up outside the continent and the financing of which gets handled by international banks. There is very limited trade between East and West Africa and far less trade between West African countries than between individual West African countries and Europe and Asia. EcoBank has long been the champion of pan-africanism but its performance has historically been under-inspiring, in comparison to its pan African peers.
To make matters worse, most markets already have banks that can provide cross-border services and that have similar footprints. In East Africa, international banks – Barclays, Standard Chartered and Stanbic have long had regional footprints. More recently KCB and DTB have ambitions to become regional banks, and have created representation across most of the countries, supported by a strong home country base.
Some of the Nigerian banks that established cross-border operations have already got into trouble. Intercontinental bank and PHB have both been the subject of regulatory intervention in their home market. To prosper in these new markets the Nigerian Banks need to define their unique value proposition, and this remains challenging.
Trust is key to banking. Although consumers are seldom choosy when it comes to borrowing, the same cannot be said for deposits. Banks in Africa need to be liability led, and need to convince customers that their funds are safe and that they provide a superior service. Nigerian banks have to work much harder to establish customer trust, given the often poor reputation of their homeland for corruption and fraud.
Many banks in Nigeria rely on Government liabilities as a core source of funding. Nigeria’s federal structure means countless Government deposits at every level of Government and across the 36 states. This is seldom the case in the rest of Africa, which have less federal structures, and where Government deposits are normally tightly held by state owned banks.
Payment services are playing an increasingly important role in banking on the continent. As a smaller player the terms on which a bank’s customers can use other banks infrastructure is a key driver of the success of a retail strategy. Unfortunately in many African countries accessing other banks ATM’s is extremely expensive, if it is possible at all, and this can kill an emerging retail banking proposition.
How then can Nigerian Banks prosper:
– Sales and service culture. The level of competition in the Nigerian market has forced Nigerian banks to perfect a sales and service culture that exceeds that of many other banks operating on the continent. As new entrants unable to offer scale or distribution, high quality service must be the central plank of the strategy, but managing service standards across a wide network of operations requires considerable attention to systems and processes, and regular benchmarking.
– Faster, smarter credit processes. Credit approval times and process across many banks in Africa significantly lag those in more developed markets. A Nigerian “can do attitude” to credit approvals could shake up the market, and will be key to winning market share
– Grow the franchise Across Africa, banks that have large networks capture a disproportionate share of liabilities and profits. At home Nigerian banks have been very aggressive in their role out of the branch and ATM infrastructure. This is a lesson that should not be forgotten in their foreign operations.
– Get the segmentation right: understanding which segments are most likely to be captured and aggressively focusing the proposition on these segments, will be essential to growing the business with a sustainable risk profile.
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