Business
Technology will break down old cultures in Banking and Finance- Jubril Aku
Jibril Aku, Chairman, SunTrust Bank
Technology is laying a sledgehammer to the previous sturdy walls of time and space as a growing number of young Nigerians adopt mobile digital methods of taking care of their financial needs. Like a garden with a profusion of flowers, financial service providers are presenting a rainbow of digital solutions to meet the evolving needs of an increasingly tech-savvy population.
At the vanguard of this Fintech evolution is Mr Jubril Aku, current Chairman of SunTrust Bank and past Managing Director of Ecobank Nigeria Plc. In this interview with Business Hallmark’s Managing Director, Teslim Shitta-Bey and Editor, Okey Onyenweaku, Aku explains how technology will redesign Nigeria’s financial space and reconstruct the ways people interact with themselves on a commercial and even social basis.
Excerpts:
One of the major trends being seen in the banking industry is that loan portfolios seem to be declining, but pleasingly, so are the impairments. However, people have said that without banks lending to the economy, the economy is not likely to grow. So, in the long term, the strategy may not be particularly sustainable, what is your take on the matter?
The issue you just raised was one of the key points addressed at the last Monetary Policy Committee Meeting. The Committee saw that aggregate credit was declining in the sector. And they also saw that some of the direct measures that they had previously used to contain excess liquidity were crippling growth; they tried to establish a direct correlation between tight monetary policy and declining credit. Of course, policy measures of the Central Bank (CBN) took the idea that if the banks had excess liquidity, their natural propensity would be for them to extend more loans and overheat the economy.
Therefore there is a constraint to mop up perceived excess money supply. At the time of the report, if I remember correctly, there were almost N4trillion in cash reserves, money that had been removed from the financial system. We call these the direct measures of the CBN to remove excess cash from banks that may have been the result of fiscal policies that released further cash into the economy. So, with almost N4trillion sterilized (remember Treasury Single Account (TSA) had earlier removed a lot of money from the system), it was expected that the threat of inflation would be suppressed. Unfortunately, however, the regulator saw that banks still had large amounts of idle cash in their treasuries, requiring the CBN to apply some form of pressure squeeze on their cash positions. And if this has majorly hurt domestic credit, maybe it has opened a window of opportunity for them to say OK, what do we do to stimulate credit?
So, I think the CBN’s MPC came up with some incentives. They acknowledged that they were concerned about declining domestic credit which was reflected in a slowdown in economic growth. So, to pull back from the adverse consequences of tight monetary policy, the MPC said, OK, if you need to create new credit we can release the equivalent of your cash reserve to you for forward lending. What that means is that the banks cash reserve that previously earned zero interest can now be used as an earning asset at an interest rate not above 9 per cent. So, the CBN takes bank assets earning zero interest rates and allows the banks deploy the previously idle cash for an interest reward. This is a form of monetary stimulus, to allow the banks go ahead and lend. If you lend N100billion for instance, and you have N500billion in your cash reserves, we will give you back that N500billion. That’s incentive number one.
Then, they went ahead to say OK, large cooperates – people like Dangote, Nestle and so on – can issue their own paper. If they issue a paper into the market, because they can attract public confidence in repayment, if the issue is not fully subscribed, the Central Bank can co-invest, again, this would put money back into large corporations as a means of stimulating the local money market. So, credit can be either banks lending money to corporations or the corporations borrowing directly from investors by themselves by putting their own paper into the local money market. These are two programmes that were brought in to play to increase domestic lending.
Of course, since the last MPC meeting, we don’t know how well the policies have performed. But we have seen an upsurge in demand for commercial paper at the FMDQ, which means that people are responding to the programme. I think that when you look at the aggregate credit, not just credit done by banks, I believe that we would see some growth. But I agree with you, a stagnant or declining credit situation will ultimately have effects on the economy.
Some people have expressed concern over our continuous indecision with regard to whether we want to have specialized banks or universal banks. In 1999, we went into the universal banking system and we argued that banks would become stronger. We have since gone back to a situation where we now have merchant banks, commercial banks and other specialised institutional lenders. What would you say is the best prescription for Nigeria?
Let’s look at the aspect of the law. From my understanding, the law never envisaged one type of bank. So, let’s talk about compliance with the law. There is no framework under the law for universal banking. It always looked at different types of banks to cater for the different sectors of the economy. We have development banks; we have commercial banks, and other specialised banks. So, if we want to comply with the law, let’s follow the law. If the law says, let’s have one type of bank, we should follow the law.
That aside: now let’s go back to even when it was about universal banking. All the banks had subsidiaries that were performing specialised functions. So, it didn’t really address the issue of the universal banking. One bank would have up to 15 different subsidiaries doing each of these specialised functions. So it gave regulators nightmares assessing who was doing what, when and where. So, the regulator again decided to decouple or unbundle these activities allowing for specialised activities with the financial actors playing to their technical strengths intervening in sectors that they understand and manage the risks.
Now, we can monitor bank performance and see how different sectors respond to the stimulus that bank credits give. For me, that’s the way to go. We should have specialised banks intervening in different areas of the economy and the regulator can then monitor their performance. It doesn’t stop big banks from growing, but they will grow in their areas of core competence.
You are chairman of a special kind of bank. It doesn’t have all the paraphernalia of brick and mortar, it’s in a sense, unique; it is essentially digital. Some people have expressed the opinion that’s it’s an idea you have introduced at too early a time in a financial ecosystem such as ours, they argue that it is too sophisticated for the environment, how do you see this?
I would say no we are not too early. Indeed, I would say we are coming in rather late. If you look at the financial system, the ecosystem, today, more people who are non banks play increasing roles in financial intermediation. Even super markets offer some banking services. You go to some petrol stations today, they can give you cash back services. That there is some banking service they are offering. The nature of banking is changing rapidly. Yes, in a branch, you can sell more products, but today, other channels are engaged in wider services.
For example, let’s look at the Automated Teller Machines (ATM). The ATM today is a channel that is doing more banking services. In the past, it was just a cash dispensing robot. But today, you can do cash transfers, you can do credit top ups, you can do a rainbow of things on ATMs. So, in a way it’s a mini -bank sitting at a specific location. From telephone apps, you can equally carry out a lot of banking operations. Millennials, for example, once they open their bank accounts, you don’t see them at the bank anymore. Everything they do is on their phones. They tell their parents, ‘put money in my account ‘. They don’t enter the bank after that account is opened. When you then look at the channels which banks use today, more services are done using mobile digital platforms than in traditional brick and mortar branches.
The nature of banking is changing. When we got our license – we are licensed as a regular commercial bank like any other bank – we were allowed to open branches anywhere, but our branches are restricted to the contiguous zones we have chosen: the South West and South South, and of course the FCT. But we can keep accounts anywhere. So if I decide to keep an account for somebody who is in another state, how do I service him? I will use the channels of the other banks to service him. Because if I on-board a customer today, I actually bring him into the banking system. That card given to him or her can be used at any bank. So, the overall national banking infrastructure is open to every customer.
So, why do you want me to open more branches when the services can be provided using another bank’s channel? The way the system is going, the Central Bank is contemplating the issue of open banking, where digital firms can also offer limited banking services, like agency banking –tomorrow, that channel becomes available to my customer. The channels through which I can service my customer are expanding daily. It’s not contracting, it’s expanding.
Therefore, I don’t see the need to open physical branches to service my customers. I will open some where I think I can do more selling and more servicing, but on how to service my customers, I have multiple channels available to me. And that’s the concept of the digital banking that will distribute banking services digitally, not necessarily through the traditional brick and mortar structures.
Is it as a result of changing demography? Nigeria seems to have a much younger population. A large number of Nigerians are on average below the age of 40. The baby boomers (those born in the 1960’s and 1970’s) are gradually easing out. So is your approach to new banking an attempt at keying into a reinterpretation of how we live our lives?
Precisely! In fact, the average is even lower than what you said, it’s actually in the 20s. That’s where you have the majority of Nigerians. And for many of them, this is how they understand financial products and services. The older people still like the tradition of what they were used to, and we still cater to them. Some of them want to be able to come to a bank and have a person to person service, we cater for that demography. But the majority today, once they sign up and on-board into the bank, you don’t see them again. They talk to you digitally. They experience your service digitally. They switch off if you are not competitive. They can switch you back on if you are competitive.
So, you need to be on your toes to meet their aspirations; what for them, banking means is not necessarily a beautiful building. It’s what a bank can do for them as part of what they want to achieve at that particular point in time. That’s why the electronic channels, which are multi-tool processing channels, become so important. Once the person comes in from that channel, whether with a card or by way of an ATM, he or she expects flawless service.
Once he or she puts a card into a digital device, they can’t afford failure because there is nobody to talk to. The concept of a call centre is for those who are patient. The ones who are not patient just switch you off at that point and switch to the next person because the cost of switching is quite low and the discomfort of switching minimal. This is where the future is. The millennial customer may not be the very rich, but that’s where banking is going.
You have been able to run a bank that is pan African. Now, the perspective you are having of the digital generation in financial technology, does it extend to other African countries? Are you seeing the same amount of enthusiasm or embrace of this new ecosystem in other African countries?
It’s there, but not at the same pace. In the Eastern African countries, they are more ahead of us because a large telephone company there bundled telephone and banking services and was able to take banking to the grassroots, that’s Safari. So, it got more people engaged because of that head start. Today, if you go to countries in East Africa, they are more developed in grass root financial inclusion than elsewhere in Africa. But I must say that West Africa is catching up in the area of digital banking. Today – again in partnership with Telecoms – we are looking at how to take banking to people who may not necessarily have been effectively banked in the past.
The next thing that may follow in all of this is that it will get to the point where we understand the customers very well. and now that we have cleaned up the data base, we now have BVN, we have a digital profile of all the customers, so we don’t have the problem of multiple customer identities; customers will protect their identities and their credit ratings, we can ,therefore, have an alternative credit scoring scheme that allows us to know the customer even better. And we can give credit with even unsecured collateral. And because we understand the customers spending pattern and behaviour pattern, the customer is not likely to default.
Because, again, we have entered into his spending system and we go around with him through his spending we can easily decide whether to give him a loan or not. This trend is becoming dominant in the pan African space. And at some point a bank would be able to use its large digital footprint as a catalyst to opening up this network to promote deeper inter African trade.
Now you are talking about Telecoms, and we are wondering whether we are going to see situations where Telecoms will actually own banks?
It’s possible, and it’s coming. And I think that when their revenue begins to come under pressure, they would naturally look at how to integrate and expand their reach. So, I won’t be surprised to see that coming up in the future. But I think for now, they also don’t want the banks to make incursions into their own business space. But they are interested in keeping their customers and introducing banking service in addition to the telephony service they render at present. They are looking at how they can bundle this into their product menus. That’s something I know is on their development agenda. Almost like going the way of the Safari, one telephone company did that in Kenya.
You can’t go to Kenya today without experiencing the fluid digital relationship between banking and telecommunication. So, they are looking at Nigeria and are asking, how do we bring banking services so that we can take telephone into banking and reach out to the last man. That is what they are looking at. They don’t think they need to own a bank to do that. Their network can allow them to do this. I think the difficult thing is that commercial banks will say no, we won’t allow you to own a commercial bank and not adopt the prudential requirements we must meet. If you want to be a commercial bank, then open one of your own and then, you are faced with the same prudential requirements that we carry: cash reserve – everything. You will also be taking those NDIC charges, AMCON charge and all of that.
But we don’t want you to avoid that and then, you want to enjoy banking services. That has been the divide, but I think I understand that there are advanced discussions at the policy level to see how we can accommodate them. But the banks have always been willing to work with them. I don’t know why they don’t want to work with the banks. We have always been open, to say look, we want to work with you, we want to reach out to your telephone subscribers. Some of them are also our customers. We can use your technology to reach out to them. Those are the things we are looking at. So, I won’t be surprised tomorrow if they do work with banks or set up banks of their own.
And the issue of the insurance companies, I want to talk about them; the problem is actually our attitude to insurance. Because the nature of insurance is that it pools long term funds, and because Nigerians look at insurance in the context of, ‘’if I pray, I can avoid risk’’. Or they ask, ‘’why do I insure against death? If you die, they just go and bury you’’. Those are the kind of things that may have hindered the penetration of the insurance business in the country.
In more advanced climes, people start to save for funerals. People value their assets, and they buy insurance to protect their assets. So, the insurance company, because it constructs a demographic table to determine the likelihood of occurrence of events, it accrues funds. But in Nigeria, it’s a struggle. They have not been able to achieve as much as Pension Commission’s (PENCOM’s) defined contribution pension scheme has done, PENCOM is a compulsory scheme where everybody provides retirement savings. It has recently generated N6.5trillion in funds.
So, where insurance companies are not providing long term savings, the pension fund scheme is filling the gap. But I don’t think PENCOM would allow their money to be used to acquire banks. The money is to cater for the workers when they ares old and need the money to take care of agedness.
Do you think the regulation in terms of the limitation of portfolio distribution of pension companies is adequate? What we are saying is that there seems to be a strong tilt towards public sector bonds and bills?
That has just been addressed. And that is because the Pension Fund Administrators (PFAs) at the beginning did not have proper mandates from workers whose money they were managing. But, recently, they have done the necessary categorisation and asked workers for appropriate mandates. they have recently revised the framework and people have been broken down into age ranges, risk orientation and income expectation. They have sent forms to workers and requested that workers pick a ‘bucket’ plan based on risk profile.
For younger people who have more years to work, PFAs allow them tick a higher proportion of their assets to go into high risk, high return investments. So, because the worker now gives a mandate, they can shift those assets to high risk, high reward portfolio, and medium risk medium return portfolios and low risk modest return portfolios. However, PFAs won’t allow a worker who is close to retirement to take a high risk bucket plan. They are likely to tilt it towards the conservative investments.
Let’s say a PFA has predominantly has young people in its retirement savings accounts, that PFA’s risk profile would be different from a PFA that has much more older demography in its customer profile. So, that change has happened; PENCOM has enforced this change.
So, yes, in the past when they didn’t know the worker’s profile, PFAs took the conservative approach to investment and they paid off when the collapse of the market happened in 2016, if those guidelines were not there, imagine the loss that would have happened. But now that you know that the worker is the one who has made that choice, he knows that he has sufficiently long enough years to work, so he can recover from a setback. These are some of the reforms that have taken place.
The market is about 32,000, that’s way below the over 40,000 that it was sometime between 2015 and 2016. Is it a meltdown that should be of concern to Nigerians?
No, because the Nigerian stock market in recent times has had a flush of foreign investors, so we need to begin to look at how these investors behave in uncertain markets or how they perceive risk. They react based on a sentiments – a sentiment that looks abstract is enough for them to react. That means we must be sensitive to the type of public communication released by our officials as statements that have negative implications lead to swift portfolio actions by foreign investors.
For example, if elections approach with the social system looking overheated, foreign investors are likely to cash in their takings and vote with their feet as they walk across the border until times look more auspicious. Remember, it’s the domino effect that brings down prices, not necessarily actual physical trade. If nobody is selling the market begins to mark itself down.
Even the stable domestic investor who is also protecting assets will say ok, I also want to move out until a safer time. He or she is reacting to a lead. PFAs, for instance, would move out because they are not going to sit on their hands and watch assets whither in value. So, they are also going to take a feet vote and these are some of the things that should make us careful in the type of information divulged by regulatory institutions, financial monitoring teams, or even politicians and the legislature. Whatever these motley interests say carries heft. We need to learn how to speak a language that builds confidence in our local financial markets.
So, yes, we may see big market corrections, but I think it’s just a temporary reaction to our market risk profile or the way foreign investors perceive that risk profile. To be sure, the same people will come back, if in their perception, key risk factors look less menacing; investors treat market triggers like traffic likes, good indices with green lights mean you can go ahead and place your money, amber indices indicate you adopt a wait and watch attitude while a set of red lights tell you to stop, pack your bags and scram! In spite of whatever is happening in America, nobody doubles and folds with the intention of leaving the market. Investors stay and if you go to other mature economies, investors equally set down deep roots because these markets have been tested over the years and found to be resilient. You can do a 20-year long investment and find consistency. We are also gradually on our way there. I think that after sometime, some of this volatility you see around certain political calendars will begin to smoothen out.
As an asset manager, did you foresee the recent market tumble?
If you go back through financial history, and draw your cyclical charts, there is a certain behavior around specific periods. How far deeper in the past it goes, is a function of how many risk sensitive investors have been in your market. So, you have to first balance how many of them are in your market, and then determine what percentage share of the market they own. That tells you that if have several or a growing number of risk adverse investors, they are likely to react decisively and speedily to new risk assessments. If there are less sensitive investors who have a longer term disposition your market will be less volatile. With the sizable foreign portfolio investment interest in the Nigerian Stock market it only stood to reason that uncertainly centred on the forthcoming 2019 general elections would lead to some amount of equity and even bond and treasury bill sell offs, but how much would occur would have been totally unpredictable.
Profit margins of banks appear thinner in the second quarter of 2018 than in corresponding period of last year. What do you attribute this to?
You started with answering some of that earlier. Credit not growing, how do banks make money? They make money from net interest margin, fees and commissions – those are the two main lines. And after you make that money, you make sure that there are no drags; that there is less operational loss. So, then your margin holds. But if aggregate credit is not growing, then that net margin is also not increasing. Remember also, even for government securities, yields have also dropped off from a high point of between 18 and 19 per cent per annum to between 12 and 13 per cent per annum. So, for the same portfolio you were holding, you are earning less. So, your net interest margin also scales down.
When you look at your fees and commission, competition eats into that and so you begin to average down your fees, so all these inclinations have led to reduce profit figures in the past two quarters. That’s why I would have been surprised if your analysis didn’t show that profit figures and stock prices didn’t come down. So, the events leading to this outcome are clear.
You have been rated as one of the most successful bankers in Nigeria. You have shown maturity and focus. That has made it possible for you to get some of the awards that you got, especially the Zik Leadership Award. What did you do in Ecobank that earned you such esteem?
Really, you have to ask the people who gave the awards. They must have had the scoring criteria. But I do know that one of the fundamental things I did in Eco Bank Nigeria Plc when I joined in 2006, was to set a goal for changing its position in terms of the league table, where Eco Bank in Nigeria was number 21 of 25. So, at the time it was considered a small bank. It had total assets of N68billion, of which capital was N25billion. And it had 40 plus branches and agencies. But the principal shareholder which is ETI, wanted a bigger share of the market. Because when you look at the market share, the market share of Eco Bank in 2006 was very small.
It had large capital adequacy because of the Soludo effect where they brought N25billion, but it had a small share of the market, so they decided that they wanted to grow the market share. And together with the rest of the team, we started looking at different combinations of how we can make Eco Bank in Nigeria get a bigger share of the market. In the course of that – almost 10 years – we did four acquisitions to bring the market share to, at the time I left, close to eight percent. And it became a systemically important bank (SIB) because we started acquiring banks which didn’t make the Soludo cut off.
From there, we started looking for others to combine with. We got AIB which was hanging, we were able to acquire it, so that grew our network in terms of branches, and suddenly we had over 120 branches up from the 68 we had before hand. We started looking for more, then we profited from adversity, Oceanic was a much bigger bank, even bigger than Ecobank and we did that combination which significantly grew Eco Bank’s share of the market. And at the time of that combination, the total staff strength of the bank was close to 16,000. So, we had to look at how to take out the excess. When I was leaving, it was down to about nine thousand.
So, I think those are significant market intervention that helped the bank to become a dominant player. When you look at it in terms of the sister banks in other African countries, they were doing much better in terms of market share, in their respective countries. In some countries, they were actually number one or two. But here, we were number 21 or 22 in terms of market share. We were even closer to number 25. Those were the interventions that helped the bank grow. Yes, were there problems along the way, naturally, if you go through exponential growth, there would be problems along the way.
But the significance is to continue to grow top line revenue so that you can address problems along the way. And I think that to an extent, we were able to achieve that. Maybe those are some of the factors that may have played in the recognition of that award.
The listing of Ecobank Trans International (ETI) on the local stock exchange has created a challenge of how to separate it from the operations of Ecobank Nigeria. In the past you just looked at Ecobank Nigeria without bothering with other markets. Today, it’s ETI that is listed. So, it’s a bit confusing for most analysts.What do you think about this?
Well, I don’t hold brief for Ecobank, but I can tell you that it’s not too difficult. The information provided at the centre, that’s at ETI breaks operational data down by countries and by regions. There are two things; ETI also didn’t want confusion between the two. ETI owns the brand, Eco Bank, and all the banking units operate on that brand, even though ETI itself is not a bank, it’s a holding company. It manages banking subsidiaries. The result ETI publishes is a combination of all the banks under its brand franchise but it provides information as to the performance of each.
What it does is that rather than sit down and provide information on 45 subsidiaries, it groups them into Anglophone, Francophone and the rest. But where there is significant information they will separate it. When you drill down the full financial statement, you see all of that. So, it shouldn’t be difficult finding out what was the contributor to what number. I think it’s there.
Is it a strategy that you would recommend for most Nigerian banks, to ease into the continental foray?
No, I don’t think I will advocate for such international expansion at this stage. There is enough deepening that needs to be done here. What I’m saying is that you haven’t fully tapped the potential of your own domestic market and you are busy thinking about supporting international operations. So, first, the cost of supporting international operation is very high. And you have to also benchmark the return you are going to get from that. And what are the risks that need to be carried. For those who have done it as an early start, they are already there.
So, they have the early mover advantage. A late starter right now will find it difficult because first, you have to remember that the countries you are expanding into are also not sleeping. They are also improving their own banking environment. They are getting investors coming into environment; they are getting more penetration, more market share. They are not sitting down for you to come and take their market share, so there is a competitive market there. So, for anybody who understands what he wants to achieve, I think Nigeria is big enough. And people want to even come into Nigeria, to show you that the market is big enough.
Recently HSBC and Economist Intelligence Unit (EIU) painted an unpleasant picture of the Nigerian economy. What is your opinion, and what do you think we should be doing on the flip side?
Well, I don’t have an opinion on what they chose to see from their own risk perspective. Are they right or wrong? I cannot comment. But we have seen such negative outlook that may have influenced the analysis. But other people are also more positive as well. So, don’t focus on the ones who are giving you a negative outlook. There are also people who give a positive outlook. They have also looked at it and said OK, the positive outweigh the negative so let’s go in. But if somebody looks at it and says the negative outweighs the positive, it will influence his write-up. It’s a function of the analyst. I haven’t read them but if you read those reports, usually, a professional analyst will tell you what the drivers are.
Then, you as a discerning investor can read as well and decide that, I have more information than these analysts in this area. I’m willing to still go ahead. You will find out that someone who is on ground, physically present in the country, will have more information than the person who came and spent just two weeks asking questions in a few places. He might for instance say that because of politics, things might go one way or the other. But between you and me, none of us is worried about that.
The former president has set a high standard that there is no need to fight in politics because the outcome of a game is a winner and a loser. Why do you fight over it? So, he has set a very high standard. And the current President has said that he intends to set an even higher standard to ensure that we don’t allow politics to divide us. It’s a game, the way we watch soccer games and if Nigeria is beaten, we accept that it’s a fair game. Why do you fight the opponent who beat you? There is no need. Play a impressive game and you will beat him. So, there is alignment and realignment… that’s politics; voters will decide their preferences.
