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A look into Nigeria’s development in a global context

Interview - July 16, 2012
Odun Odunfa, CEO of Kedari Capital Ltd, urges investors to look beyond negative stereotyping and provides a real overview of Nigeria’s development, highlighting that its banks are now ‘rated at the top of their game’ on the continent and are fundamental to the nation’s sustained progress

Real GDP growth in Nigeria is expected to average 6.7 per cent for the coming years. Despite global economic downturn, Nigeria is back on the right path, although many challenges still have to be addressed. Proof of this are the reforms being undertaken in all key sectors of the economy in order to diversify away from oil and gas. Could you comment on Nigeria’s financial sector as an economic driver, and the role it plays within government’s transformation agenda?

The Nigerian financial sector is crucial to economic growth. In fact if you look at the stock exchange, the capitalisation of the banks often represents between 30-40 per cent of the exchange. I think that gives you an idea of how important it is to the economy as a whole. Globally I think it is recognised that there can be no economic growth if there is no intermediation by the banks, taking businesses from deficit to surplus, providing operational capital, etc; so it is definitely key. The history of the Nigerian banking system, especially over the last 20-25 years, has been a success story, despite the challenges we have faced. Nigerian banks are rated at the top of their game in Africa today, and also currently feature in the global list of banks worldwide. My take is that the industry has done well, and will continue to do so, because of the type of people and institutions that we have, the emerging regulatory environment, and the general focus on development in our economy.

Despite the new focuses on agriculture and manufacturing, is the government doing enough to diversify the real economy away from oil?

They are doing something, but I am not sure that ‘enough’ is the right word. ‘Enough’ implies that all has been done; in the Nigerian case, there are obviously more steps to take. Agriculture incentives need to be put in place and in an objective manner. The manufacturing sector needs to be further incentivised to perform, because you cannot leave the manufacturing base to the economic forces of demand and supply alone. Today the West is trying to push for open trade between economies. If you have a highly developed and sophisticated manufacturing base, producing at near full capacity, it is easy to push for open trade, but when struggling with issues of power, infrastructure and transportation, I am not sure if it is in your best interest to push for open trade. My view is that targeted incentives should be put in place, and more should be done to support the manufacturing base of Nigeria’s economy.

The Nigerian Stock Exchange (NSE) is the second-largest financial service centre in sub-Saharan Africa. Total market capitalisation is 63.4 billion, but is expected to reach 1 trillion in the next five years. Do you think the trillion target is feasible, taking into account the NSE’s current situation?

I think it is achievable in two years. For example, if you look at the top-performing companies in this country, they are not on the NSE. Around 80-90 per cent of our foreign exchange comes from oil, as well as 40-50 per cent of our GDP. With the major players in the oil sector sitting on the exchange, 1 trillion is nothing, it can be achieved. It is the same in the telecom sector. That is really the story. If the telecom sector entered the NSE, we would probably be talking about 5 trillion.

The NSE does not reflect the economic realities of the country. What steps need to be taken in order to attract new players to be listed?

It is simple. A friend of mine cracked a joke the other day, and I tend to agree: if you are making enough money in your business, you will not be interested in bringing other people in to share your money. That applies to the situation in Nigeria. Why should the people who are really making revenues in oil and telecoms give it up? It is a robust combination of incentives and legislation that will allow these companies to see the benefits of listing. I do not believe that you can just force them to list overnight. They must be able to see concrete benefits in listing, such as tax incentives, etc. It has to be a carrot and a stick. It is not in our interest as a country for those companies to remain unlisted.

Could you comment on Nigeria’s potential to become the gateway to African capital markets?

I think the potential is high to become the gateway to Africa in terms of capital, for a number of reasons. Today people talk about the emerging markets like China, India, and Brazil, as well as the traditional markets of the US and Europe. The one feature that you find in all of these countries is the number of people they have. Population has a role to play from that point of view. Nigeria has 160 million people out of approximately 600 million Africans, so the numbers are there.

The other aspect is the economy’s productive base. We are working on that, and given the ongoing reforms in power and infrastructure, we will hopefully get there in the next few years. The third point that attracts capital and makes the market vibrant is rule of law, as well as the stability of the operating environment itself. Over the last 15 years or so, Nigeria has become more stable politically; democracy is entrenched and rule of law is beginning to find its feet. Sometimes people judge us harshly, but world history is filled with countries that have gone through much of the same process. I hope that we can find our feet soon.

Nigeria’s capital markets are highly developed for a low-income country. What lessons can be learned from the 2008 crisis? 

You have to cut down on the speculative borrowing. People have to try to live within their means. As much as you deregulate finance, do not deregulate to the level that it becomes imprudent. Some of the products we had in the Western markets that led to the crash – the people created, sold, and bought them – were done by people who did not fully understand what they were doing. It was just profit for profit’s sake, and so the crash came. I think we have a lot to learn. We have to keep credit expansion in check, and ensure we return to the fundamental principles of how much credit an individual, company or institution takes on. That is the bottom line.

Nigerian banks are in one of the healthiest states they have been in for the past years. What are some of the conclusions we can draw from the Central Bank’s latest reforms?

The first thing is that nobody is immune. If you take the wrong steps, you end up in the same place. Secondly, the amount of capital is not a cure for all the problems in the financial sector. Otherwise, Lehman Brothers would not have failed. In my view, it is not an issue of capital, but rather an issue of risk. What is your appetite for risk compared to your capital? A small bank with small capital can be healthier than the biggest bank with the most capital.

What role does innovation and technology, such as e-banking and mobile banking, play in the industry’s future?

It plays an inevitably progressive role. Business the world over today is done electronically. It is definitely more efficient, more cost effective, and in a way, more civilised. It is a cheaper and safer way to do business. The Nigerian economy has no choice and the steps have already been taken to fix that. The average Nigerian with an account has access to cards – credit or debit – and online payments. Today, the limiting factor is infrastructure, with connectivity and power issues at the top. As we begin to address these issues, it will become even more ubiquitous to use e-banking platforms for everyday transactions.

In terms of banking industry reforms, what steps need to be taken further?

I think what is left is what we used to call moral suasion. We tend to underestimate the power of moral suasion, getting people into a room, agreeing to what steps need to be taken, and how. No matter how stringent the regulations are, if people do not agree to a set of moral codes and principles, you are wasting your time. People talk about how strong the Canadian banking industry is, and how it weathered the storm of the crash. But it was not regulation per se that saved the Canadian banks. It was a group of people coming together and agreeing how to conduct business. That is what we need to do at this moment. If we can do that, even some of the expectations concerning the issue of over-competition in the market will be tempered. People will then be able to do business properly. It is good to compete, grow, and be the biggest and the best, but at what cost?

Kedari Capital has a wide range of businesses, including corporate finance, asset management, and consulting, in key areas such as energy and infrastructure. As one of the leading investment banking firms in Nigeria, what strategies does the company currently have to further enhance its competitive edge?

What we do differently is focus on a few areas. To an extent, we do not wait for the business to come to us; we go to the business. We recognise in an economy such as ours, that skills and capital are limited. So if you have a combination of the skills and the capital, you are better off putting the deals together yourself. That is what we are trying to do in power, infrastructure and with our bank acquisition in Ghana. The differentiator is that we are happy to sponsor projects, form teams, look at different ideas and put together the building blocks of what would make it work. That will continue to be the way we do business. We also believe in doing things right, we do what we say and we believe in what we do.

In terms of energy research, Kedari is very involved in renewables. What are some of the opportunities that can be found in this industry within Nigeria? It has had a rather slow start and timid backing by government.

For the future, the opportunities are endless. But I do not blame the government, because they have other priorities at the moment. If you only receive one meal a day, your focus is on getting that one meal; you are not thinking about dessert. The Nigerian power situation is such that we are in dire need of electricity, so renewable is a bit too exotic for the government right now. They have to focus on getting electricity cheaply, on a massive scale, as quickly as possible. Right now it is about oil wells and gas power plants, where 500 MW or 1,000 MW are ready to go, and you can power the nation. When you talk about renewables, you are talking about incentives and subsidies for production and distribution, which may only get you 20, 30, or 40 MW at the end of the day. A 50 MW wind farm is a major wind farm project.

I empathise with the government, but it is our duty to continue to educate them and make them understand that power generation, distribution and transmission should be an integrated network. You cannot neglect one power source for another, no matter how desperate you are. You will reach a point where it will not be sustainable to use the same sources on an endless basis to achieve the needed goal. In a country like Nigeria that is blessed with natural resources – rain, water and sunlight – you also have a duty to harness those assets. We are working and spending lots of time, money and effort in trying to put these things together. We hope that in the future we will be at the forefront of renewable energy in Nigeria. That is an ambition we are willing to put our resources behind.

What impact will your renewable projects have on the overall power industry in Nigeria?

At the rate of 30-40 MW, you can say it is not huge. But Nigeria is in need of 30,000- 40,000 MW so every additional MW you add is critical. Especially in rural areas, the impact can be quite significant.

Where do you see Kedari’s future in this regard?

Clearly the future is bright, and we are working towards that. We hope to convince the government to pass some subsidies towards renewables. Pricing renewables cannot be done in the same way as normal power. Pricing regimes all over the world take into consideration the additional time and capital invested, as it is a much more expensive venture. We hope to reach a position where we can see the desired impact.

The government is trying to increase capacity to 40,000 MW in the next five years. Is this feasible?

It is tough; I do not think so. That is a tall order. If you are going to get power in five years, you need to start now. If you are at 6,000 MW and you need to reach 40,000 MW, you need an additional 34,000 MW. You have to identify gas resources, order turbines and build the distribution and transmission network to support it. I do not think 40,000 MW is feasible in just five years. Having said that, can we achieve 40,000 MW in 5-10 years? For sure. The first step is to complete the deregulation and privatisation of the industry, so that smart money follows smart investments. You need a deregulated environment where private companies are able to invest and exit. As we saw in telecoms, it went from 400,000 lines to 17 million lines today in just 10 years. It is clearly possible to go from 4,000 MW to 40,000 in 10 years. But to complete this in five, it should be in motion already.

The government is talking about a gas revolution, with more gas plants and independent power projects (IPPs), which I agree with. But that does not happen in six months. The government is acting, and I hope we will see the affects as we progress, but for me, 40,000 MW in five years is a stretch.

With regards to Kedari’s interest in PHCN’s subsidiaries, could you please comment on your bidding process for the Ikeja and Benin Discos?

We started out with our Zambian technical partners Copperbelt Energy Corporation, our local partners Catamaran, and ourselves. We started the process about two years ago and thankfully we have gone through the prequalification for both Ikeja and Benin. We are about to submit the final technical and financial proposals, and we are hopeful that with the amount of time, effort and money spent, we will be selected as the preferred bidders for both or at least one of the assets.

Regarding your acquisition of 75 per cent of strategic share of First Atlantic Merchant Bank in Ghana, what impact does that have on your portfolio in terms of expansion?

It has a big impact. We are hoping to make it one of the top five banks in Ghana in the next five years. We are doing everything possible to make that happen, leveraging e-banking platforms, international partnerships, and deepening our branch network on the retail side. We are also looking at expansion beyond Ghana in the future, if things go the way we believe they should. It is a strategic acquisition for us; it complements the business we do in Nigeria and opens us up to more investors and clients that we can cross sell products, either in retail, investment or wholesale banking.

What plans do you have for expanding the Kedari brand in the region?

The first action is this investment in Ghana, although it will continue to run as an independent business. We believe in the opportunities in Africa, especially sub-Saharan Africa. Our initial focus will be West Africa, where we are currently looking at a few projects. Sometimes there are language challenges and barriers, but as has been proven in the last 10-15 years, if you are sensitive to your environment these are things you can overcome. I have worked in a bank that has a pan-African presence. My view is that it is possible. We are focused on the key markets before we move onto the smaller ones. If you look at the affinities and similarities between Ghana and Nigeria, it is a natural choice to start. From there we will do more across the region.

What role can German investors play in Kedari and its subsidiary companies?

Without a doubt, Germany is a world-renown industrial power and productive economy. Most of the initiatives that Kedari is undertaking are in the productive economy: power, infrastructure, ports, etc. The opportunities for German businesses or investors to partner with us are tremendous. I believe one of the challenges for European businesses in Africa is identifying good projects and good partners to work with to make those projects happen. I believe that Kedari would offer them an opportunity to achieve both objectives in one. We have a host of projects, which are ours and third-party projects, whether public or private sector. They can also find a partner in us that is serious, focused, and will do everything to ensure that things are done properly.

Kedari Capital is a great example of success for the international community and German audience, highlighting what can be achieved in Africa and Nigeria by an indigenous company with local expertise. What would be your final message regarding how perception has impacted – negatively in most cases – on investment in Nigeria and throughout Africa? What do people need to know regarding the reality of the country?

I think perception about Nigeria is one-sided. You have to see the whole view before you can make an informed decision. Nigeria is not all about bombings, killings, and criminal activity. Nigeria is also about business and investment, people who are determined to make things work, and people of integrity. Nigeria has a population of 167 million. If 10 per cent of Nigerians are corrupt, we are talking about almost 17 million people, which is bigger than many European countries. But you cannot take away the 145 million decent, hard-working people who are trying to make things better for their country. My message is that you need to see Nigeria in a global context before making a decision.

Nigeria is full of opportunities and German investors need to consider those opportunities and how they would like to feature in the Nigerian market. If you believe in stereotypes, you are not likely to do anything because you have to reach out. People talk negatively about Nigeria, but Shell, Mobil, and Chevron are here. Lufthansa, British Airways, Virgin Atlantic, Emirates, Qatar Airways, Air France and KLM fly here every day, among others. Nestle, Cadbury, Guinness and all the other major multinationals are here as well; some have been here for as long as 100 years and have never left – if anything, they are increasing their investments in the country. Coca-Cola is spending money every day to expand its investment in the country. You can find huge German businesses like Siemens, who probably have a trillion turnover here, as well as other smaller businesses.

You need to find the partners you can work with, the areas you are interested in, and a platform to make those investments a reality. You will typically walk away with very good returns, much more than you can get from many world economies today. Nigeria is a destination that people need not be afraid of. The perception out there is not great, but that is not the entire story.


Taiwo Bello
26/02/2015  |  19:23
100% of 1

This is certainly a good assessment of Nigeria's future in the global context while having a good grasp of the present for future investment opportunities. That multinationals like Guinness, Cadbury, Coca-cola etc still operate in Nigeria tells a lot about returns on investment opportunities within 160 million Nigerians.