Banking sector needs to be attractive for foreign investors to grow economic liquidity, says Adeola

Yemi Adeola, MD, Sterling Bank

In this interview, the Managing Director/ CEO, Sterling Bank Plc, Yemi Adeola, tells The Guardian’s Business Editor, Clara Nwachukwu, about the bank’s foray into agriculture, fashion, arts, environment and other interventions to put the national economy on a strong footing. Excerpts:

The Real Sector and SMEs are seen to be the mainstay of the economy. However, there is a view that Nigerian banks do not provide adequate support to the Real Sector, thus explaining the slow growth of the economy.

The general perception appears to be that banks prefer to lend to low-risk areas of the economy where the chances of recouping their funds are highest; targeting Trade, Commerce, but not Manufacturing.

What is the position here at Sterling Bank?
Generally, large loans dominate the economy. It is true that Credit to the private sector goes to large corporates in billions, with less than 20% going to the SMEs. 

The logic behind this is that it is better to have fewer loans with less effort, than millions of loans with huge resources and manpower requirements.

However, that logic is flawed, and we are beginning to see a paradigm shift. This is because if one, or two, or three of those mega loans go bad at the same time, even the strongest of banks would be shaken to the point of insolvency.

However, big loans are still needed in the areas of infrastructural development, housing, etc in order to strengthen the economy. Our position at Sterling Bank is to achieve the right balance – a few big loans, and more of the SMEs in critical sectors of the economy.

It has been proven that where SME loans are properly modelled, with clear target markets, risk acceptance criteria, thorough cash-flow analysis and most importantly the character and integrity of the borrower, are taken into consideration. Such loans hardly become delinquent. Of course, in a recessionary economy, the operating environment might be so harsh and the loss norm rises beyond what is typical – but this is an abnormal situation.

The key success factors to SME lending include amongst others: adequate training, keeping proper books of accounts, having appropriate structures in place, not co-mingling owner’s money with loans, ensuring there is equity in the business, ensuring they are not over-leveraged, and some form of government support – if you like, call it subsidy.

This is what we are doing at Sterling Bank through our MSME Academy. We bring SMEs together to train them on corporate governance, sound decision making, effective management of risks and cash flow etc. Thereafter, we lend to them and it is really working for us. We are committed to supporting SMEs to drive industrialisation because they are the engine of growth in all economies. SMEs have the capacity to contribute significantly to the country’s GDP.

We have identified about four challenges facing the sector and the first one is the lack of data. In other jurisdictions, before starting a small business, individuals already have a credit card history because they have been borrowing and paying back. The system takes their individual history and builds on it. Here, we lack that data. When SMEs approach us for loans that we have our first interaction with them, there is no credit history, no background data, etc. that should not be.

The second challenge has to do with collateral-dependent lending. Whilst large corporates have no problem with this, most SMEs do not have properties to use as collateral. The good news is that with the introduction of the collateral registry in Nigeria, this problem will soon be over.

There is also the challenge of inadequate expertise or lack of skill either on the part of the SME or even the banker. For instance, few bankers have an in-depth understanding of the dynamics of the Nigerian movie industry; same for the music industry and the emerging Fintech industry. There are so many small emerging areas, which are opaque to bankers and for this reason; they tend to avoid lending to those industries.

Another challenge is that many SMEs operating in the country lack proper structure. There are several instances of such businesses not adopting proper book-keeping and governance practices.

In the last three years, what we have done is to train over two thousand SMEs across the country through our ‘roving’ MSME Academy, which moves across major cities in search of SMEs with the potential to scale. We bring in professionals to train and assist these business owners in areas that include business plan development, book-keeping and taxation, among others. They do not have to be our customers. These trainings are subsidised, and we have spent over N200million in the last two years. We believe that if we train them and they know how to run a better business, it becomes easier to lend to them.

On our own part, we are developing capacity internally to improve lending to the newly emerging areas. We presently have in-house experts in the areas of Education, Health, and Agriculture, and are also building capacity in Renewable Energy. We believe that if our people understand the dynamics of these sectors, it becomes easier to lend to SMEs.

Despite the statistics that we get from the National Bureau of Statistics, Central Bank of Nigeria, and other government agencies regarding the health of the economy, people tend to disbelieve because there doesn’t seem to be anything on ground when you compare the realities with such statistics.

Why do you think that there is so much scepticism about the data that we get?
This sentiment is quite understandable, and I agree that for the vast majority, perception is based on current realities. Although the economy has officially come out of recession, it remains in a fragile state. The average individual or business is unlikely to feel any meaningful growth effects at this level of fragility.

At best, we will end the year with a GDP growth of 1%. IMF’s forecast for 2018 is about 1.8% growth while the Federal Government is forecasting about 3.5% growth.

Now, you cannot have an economy with the kind of population growth circa 3%, and huge infrastructure deficit that we have, and expect a 1.8% growth to have any meaningful impact on the citizenry. It is like comparing the impact of a 1.8% salary increase, to the impact of a 10% or 15% increase. For us to feel the impact of positive economic growth, we must be growing this economy at about 7%.

Can we get to that level in another two years?
I doubt it. If we look at the Q3, 2017 numbers, the two sectors that recorded GDP growth were Agriculture and Oil & Gas. The impact of Agric is felt more in the rural areas than it is in the urban areas. Oil & Gas on the other hand, hardly creates employment. The sectors that contribute meaningfully to employment growth in the cities are Trading, Manufacturing, Real Estate & Construction etc, and they are all still in the negative.

Still, on the economy, the government is proposing a budget of over N8.6 trillion surpluses for 2018 and that is 16% above the current estimate. I will reiterate that the realities on ground do not match what government plans to do with this quantum of money, especially the fact that the country must go borrowing to finance this budget. Do we really need to do that at this point in time? Considering that we had successfully exited legacy debt but are now being plunged back into it again?
The strategy of government to borrow more especially externally is a step in the right direction. The conventional way to get out of a recession is to increase government spending and thereby increase economic activity, jobs and increased consumer spending.

The alternative is for industries to close down, retrench staff, create unemployment problems, and experience a squeeze on household income and consumption. This will certainly create a negative spiral.

Do we have an option? Is there something else we could do beyond just waiting?
No, we do not seem to have an option in the light of the huge infrastructure deficit and the level of capital required in order to create an enabling environment for businesses to thrive.
Let me reiterate that prioritising infrastructure and capital projects can jump-start the economy. However, there is also the opportunity to collect taxes more effectively because a lot of people with significant earnings presently fall outside the tax net. If they are all captured, government revenue will increase, and we will borrow less.

There are lots of assets owned by the government that are not being optimised because they are extraneous to the primary function of government. It is best to dispose of those assets and use their proceeds to fund infrastructure. There have been discussions around which of our oil assets to sell off, because running oil companies is not the job of government. The role of government is to create an enabling environment for the people and businesses to thrive.

For instance, some lawmakers are a bit sceptical about the assumptions on which the budget was based. Do you think that given the realities on ground those assumptions are achievable in 2018?
Let us look at the assumptions one by one. First, is the oil output of 2.3 million barrels per day. This is dependent on our ability to manage the Niger Delta situation properly. Assumption 2 on oil price at $45 per barrel, is quite conservative in my view. Oil price has tested $63 – $64 levels. So, $45 appears extremely conservative. It could be better and if it is, we are all better for it.

Of course, this is subject to developments like the crises in Iran, Yemen, and North Korea. Asides the production quantity and oil price, I think the other budget assumptions are generally okay. I think what we should be talking about is the structure of the economy. For example, going by the Q3, 2017 numbers, of six key areas of the economy, only two grew, while the other four contracted. Agriculture and Oil & Gas grew, but how many people are in those two sectors? One can argue that the Agriculture sector has numerous players, but the reality is that Agriculture is predominantly a one-man venture in the rural parts of the country. Other sectors such as Manufacturing, Trade, Telecoms and Real Estate (all of whom employ labour on a significantly larger scale) contracted.

We need to move the economy away from one where oil determines everything. The Government has made great efforts towards developing the Agric sector, but there is certainly a lot of work to be done in other sectors. I believe that should be the focus.

Some operators in the oil sector will argue that the financial services system has also contributed to stunting growth in the sense of interest rate charges and all that.

There is an assumption that banks determine the interest rate. Actually, the interest rate is determined by the Central Bank which is why we have negative interest rates in some countries and double-digit interest rates elsewhere.
When the government borrows from the financial service system, first, the risk of banks losing money is zero. Second, the cost of processing that credit is almost zero and finally, the tax on revenue you earn from government securities is zero. When the government issues treasury bills at 18% discount, the effective return for lending to government is more than 25%. Interest rate is influenced by the Monetary Policy Rate and if it is undesirable, the rate is reduced. Once Monetary Policy Rates goes down, lending rate will also start to go down. It is not the financial services sector that sets the interest rates; it simply responds to the policy that the government has put in place. And if the government desires, through the Central Bank, to have a different interest rate, they will simply use the appropriate tool to achieve the desired result.

Let me also add that whatever government, through the CBN, decides to focus on, whether it is inflation or the exchange rate, will determine the direction of the interest rate.
For the past couple of years, the focus has been to manage inflation and ensure exchange rate stability. Now we are getting to that level of comfort and consequently, we may start to see changes in policy soon. The interest rate is all about the direction the CBN points.
There are very toxic exposures in the financial services sector. DISCOs are a very good example. At a recent forum, it was said that DISCOs do not presently have the capacity to service their debts and cannot access additional loans to improve their capacity to deliver electricity.

Are you in that kind of quagmire where you have some exposure to DISCOs but cannot move forward with them. Yet without power the economy is going nowhere?
Fortunately, our loans in that sector are performing well. Having said that, it will not be right to say that all is well with that industry. There is the need for a holistic reform of the power sector.

Unless the appropriate tariff is paid, the sector will remain unreliable and some of those loans will remain stressed. This is because the level of cash flow required for those loans to perform is not being generated because of the rules. There are major players seeking appropriate pricing in that sector and unless that is done, it will remain an albatross. I think the number of areas where we expect the government to provide subsidies has become a major challenge, whether it is in the Power or Energy sector.

The challenge is that when the government provides a subsidy, the resources that would have been used to provide other important infrastructure are no longer available. It is a very difficult choice and government must come to the realization that they cannot do everything, and the sad part of subsidy regimes is that it distorts the market.

The challenge with DISCOs today is that a lot of them are not able to attract additional equity. What they need now is equity, not additional loans from banks. Those who have capital are thinking if I don’t know the price at which electricity is going to trade over the next couple of years, how then can I calculate my risk? It is important that we make that move to attract equity to the sector. When there is sufficient equity in those businesses, they will make the right investments and at the same time repay their loans.

Coming to Sterling Bank, even though you said that your exposure to the Power sector is not that high, can you give us an idea of your Non-Performing Loan ratio and what are you doing to manage your exposures in general?

Presently, our Non-performing loan ratio is under 7%. Without a doubt, we are taking it to below 5% which is the acceptable industry threshold. However, we recognise that when an economy is going through a tough period, borrowers often find it difficult to meet their obligations.

We are working with them and guiding them to ensure they meet their obligations. Our role as bankers goes far beyond taking deposits and lending. In a tough economy, we partner with our customers, guide and direct them to make the right decisions to help them manage their debt optimally.

Have you really learnt some lessons? In the past, it was so attractive to just move in a direction especially in the downstream because it does get credit for diesel to be imported. But when things came crashing, I think it affected banks. Are there lessons to be learnt and what can be done going forward to guard against such happening again?

To be honest, we have not lost much money in the downstream sector. The model in use ensured a guaranteed sum to be paid back through the PPPRA once proper documentation was done. We are all awaiting the next tranche of the Government’s obligation due to oil importers. The moment it is paid, more than 50% of the problem will be solved. It is not that they are in default; they are just waiting for the government to pay.

I understand that approvals have been given at various government levels, but the bureaucracy must take its course. There is no crisis at all because the funds will eventually come in. Presently, a lot of importation is done through NNPC which ordinarily should ensure a high degree of stability in the supply of petroleum products.

Our reason for supporting the downstream sector was because it is the lifeline of the economy. Without the support of the banks in the oil sector, the country would grind to a halt. Sometimes, we lay emphasis on just lending to the real sector, but today, even the real sector must run on fuel and if the fuel is not there, it will not be able to function. What is the point of having a factory with no diesel to run it? Sometimes, the banks act in the best interest of the economy, at a cost.

For instance, people look at the oil and gas sector and they think it is not part of the real sector. But at a time, the government needed banks to rise and support those that were going to take over assets in the sector. If Nigerian banks had not been there, we would not be producing 1.8 million barrels today. The oil and gas sector is critical to the economy.

It is just that people distance themselves and assume that unless you are lending to manufacturers, it is not the real sector.

You also mentioned the issue of power earlier. Again, Nigerian banks rose to the occasion. If that had not been done, the modest achievements in the sector that we have today would not have materialised. Despite some of the difficulties we have experienced in the past, we still must continue to finance the sector diligently and ensure that we are dealing with the right people who truly bring the products to the country at the appropriate price. There is no basis for any bank to lose money because the pricing mechanism has taken care of all cost considerations.

The banking business is such that there will always be losses and non-performing loans. It is unrealistic to have a situation where non-performing loans will perpetually be below 5% because the ratio is dependent on what is happening in the economy. Sometimes your non-performing loans will rise after which they will come down. It is cyclical, and we should not be terrified of moderate non-performing loans.

Speaking specifically for Sterling Bank, how would you react to calls for a recapitalszation of Tier 2 banks because of the current economic situation?
Capital – whether Tier 1 or Tier 2 is not about the tiering of banks. Permit me to use a simple analogy: if you are a meat seller and you do not have enough in stock, customers will certainly pass you by. But if you are well stocked and competitive in terms of pricing and quality, customers will buy from you. Our own stock is deposit on one hand and capital on the other. There is what is called capital planning. You cannot run a bank without a capital plan because you need to have a long-range plan for allocation of capital to meet your commercial goals.

Every two to three years, you must look at your capital.

The regulators have given certain thresholds. If you operate a Tier 1 bank, you need a minimum Capital Adequacy Ratio of 15%. If you operate a Tier 2 bank you need a minimum CAR is 10%.

Now, these ratios are high by international standards but maybe it is good for us here or maybe not. It is debatable. Today we are above the threshold of 10% at Sterling Bank but we know that it makes more sense to be far ahead of the threshold than to be lower or at borderline levels.

Today, if you ask people/entities to bring money and equity to back the industry, there will likely be some reluctance, as they will assess the present state of the economy, their expected returns and a host of other factors.

The truth is, the return on investment in the Nigerian banking industry today is not exciting. However, I do not expect this to remain so for much longer. As the economy improves, the banking industry becomes more appealing.

In situations like this, banks opt for Tier 2 capital, which is long-term debt, ranging from five to 10 years. This is being done by many Nigerian banks including Sterling Bank. We are working on raising additional Tier 2 capital that will take us to a CAR of about 18% which is more than adequate.

What are your plans to shore up your capital? Are you approaching the capital market or following the example of some banks going for Euro Bond?
I was going to address the issue of capital from the perspective of the economy. When we talk about capital in the banking sector we tend to think of it as the problem of one bank or the other. The truth is that Nigeria has one of the lowest ratios, comparing the balance sheet of the financial services industry to GDP.

This means that the amount of resources available for the financial services sector to lend to businesses is highly limited. There are many places where it is over a 100% in relation to GDP. But in Nigeria, it is less than 40% and this is so because not enough capital is coming into the banking sector. It is because the returns and risks are not sufficiently attractive.

People tend to think that banks are making so much money, but the reality is that it is clearly not enough money for capital to come in. Even the people complaining that banks are making so much money are not buying bank stocks. Something is fundamentally wrong with that assertion.

The reality is that if the sector does not become attractive it will not get capital. The balance sheet of the financial services sector must grow at a reasonable proportion to GDP. If it does not grow, even if you give all the money to the real sector, it will not be enough to grow the economy. There is a need for us to realise that the banking sector as a major source of short-term capital for economic growth needs to be attractive so that local and foreign investors can bring more capital in to grow liquidity to improve lending to the economy. It is a problem for all of us.

Are you opting for Euro Bond or approaching other capital markets to raise funds?
The way we look at capital planning is not to tie ourselves down to a particular market. For instance, we have a capital programme that allows us to raise money from the local market and sometime last year we raised over N8billion. We also have a conversation going on with financial counterparties offshore and we do this to get the best pricing. We do not know the market that will give the best pricing and the best terms. If we lock ourselves in only one and the terms are not good, then we may not close the deal. I can assure you that we are having engagements in all the markets.

You operate under regulations, what exactly do you expect from the government or the regulatory authorities including the CBN? What exactly should be done for commercial banks? Are there specific suggestions you can make for the banking sector to be helped?
Regulators need to reward banks that are lending. Today, the rules do not reward banks who lend more of their deposits, especially to the SMEs. What we have found is that banks are putting most of their deposits in risk-free assets and a limited amount in the real sector. 

To that extent, it will be great to have incentives. If you say to me for instance, that if I lend money to the real sector, you will deduct that from the reserves I need to hold, I will respond positively. Taking that into consideration when deciding between putting money into risk-free assets or lending, I will rather lend to the economy because there is additional benefit from it. That is very important because of the owners of banks, that is the shareholders, respond to such incentives.

The second one is not just about banks. If policies are not right and consistent, no matter how desperate you are to lend to the real sector, the risk of losing the money will keep you away from it. The Presidency has done a lot of work in the last year to improve the ease of doing business. Ease of doing business should not just focus on international and local investors but also on banks.

For instance, there are things around legislation that presently make it very difficult for us to recover money. Today in Nigeria, if borrowers choose not to pay, it is very difficult for the banks to recover money. It is also very difficult to realise the collateral. The legal system is very slow even when someone has taken depositors money and refused to pay. These are the things that make banks run away from lending to the real sector. If the government wants banks to lend more to the real sector, then it must tackle these issues. 

There is this other thing, the banks don’t easily come under focus once the government is talking about corruption and then forgetting that the banks operate by rules. If the rules say deposits beyond certain threshold must be reported to the government and you do that, why would any bank’s executive be harassed?
I think things are improving now. The Office of the Vice President intervened and educated the various agencies on the need to be careful in sending the wrong signals about the banks to prevent a systemic risk which may endanger the economy. There is more civility now. Government agencies with any query now write to ask questions. I think that we must make it clear that the banks belong to all of us. About 80% of the assets of banks are depositor’s money. When you do anything that hurts the banks, its hurts the people. Government exists to protect the people.

Your stock has not been faring too well. What are you doing to attract investors to take up your shares at the stock market?
I think the shares are doing well relative to the rest of the market. I think the rest of the market has not done much better and for us, if you see a share price rising when the economy is shrinking, I think you should ask questions. We reflect the economy.

It is a difficult time for the economy and it should equally be a difficult time for the banks. For our share price to have been stable, I think that is a sign of trust. People are not dumping our shares. We would not want our shares to not reflect reality.

This is a conversation we rarely have; the capital market is independent and free. It is not for us to either manipulate or determine or dictate the pricing. Our job is to run a good bank and when the economy starts showing strong signs of recovery, it will reflect in the pricing of the shares of the bank.
There are allegations of a lot of manipulations of the pricing in the stock market.

I am not able to comment on that. All I know is that Sterling Bank does not engage in such practices, if indeed they exist.

How are your results for the year-end and are your shareholders expecting a good return on investment?
As a Public Liability Company, any such discussion would be construed as insider abuse. One of the consequences of that, is jail. I think you should speak to us on that, after our results have been audited and published.

It has been around 10 years since you have been at the helm of leadership at Sterling Bank. If I remember correctly, the tenure for bank CEOs is supposed to be 10 years. Are you prepared for your exit?

I am more than prepared for that, when the time comes.

Have you also prepared for your succession?
Certainly. Succession Planning is an ongoing process at Sterling Bank, across the institution.
The trend in the banking industry is that after the CEO exits, they come back to serve as Chairman. Is that an option for you?
First, regulation does not permit it. Once you leave, you must be out for at least three years before you can come back. Now, where you have a good Chairman, why would you want to unseat him? We have an excellent Chairman and we are happy to have him do his job.

I think I have had a fair share of the banking industry. I have been at executive management level for close to 20 years (as Executive Director and Managing Director combined).

It’s good to hear you say this, but when that tenure issue came into play, there was a lot of worry over it, and people felt that ten years was too small for a CEO to really execute his plans successfully?
As a CEO, I think 10 years is okay. There is no vision that you want to execute that you cannot kick start and see through (if not completely, to a reasonable extent) in 10 years.

What are the specific things that you can tell us now that you have done differently that stands you out from the crowd in terms of helping the Nigerian economy in the areas of intervention?  
We are clearly a top three bank when it comes to financing agriculture and we have done this for the last five years consistently. A lot of the programmes that are now being used nationwide to finance agriculture are ideas which started with Sterling Bank. If you speak with the CBN or any of the government agencies that are responsible for financing agriculture, they will tell you that Sterling Bank is a force to be reckoned with. When it comes to environment, for the last decade, we have spent millions of Naira in supporting the state governments to keep our environment clean. Most of the cleaning kits that you see cleaners wear across so many states in the country are provided by Sterling Bank.

In addition to that, we organise a national cleaning exercise which promotes hygiene and sanitation on a regular basis. In 2017, we covered 14 states of the Federation. We participate in cleaning as bankers to encourage the belief that cleaning the environment is a task that must be done by all.

We also pioneered the conversion of used batteries for tree planting. We have companies that take away the batteries to properly recycle them and in return they use the proceeds for tree planting. It has been a success and we hope the industry will adopt it as a standard.
Still on the environment, we recently promoted an art competition tagged ‘Recyclart’ where we encouraged young and aspiring Nigerian artists to convert waste into artworks.

It was very successful with the Vice President (Prof. Yemi Osinbajo) visiting the Recyclart exhibition booth during the African Culture and Design festival in Lagos. We invested in Recyclart to boost the culture sector while also championing the cause of the environment. It is about creating employment and at the same time calling attention to the environment.

Moving to education, we spent the last three years building expertise. We are the first bank in this country to get approval for a student loan solution that will allow us to lend to students who are doing well in selected schools and courses.

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