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“This is an environment where in certain sectors the return on equity is as high as 20%”

Interview - April 3, 2013
Stephen Olabisi Onasanya, Group Managing Director and Chief Executive Officer of First Bank of Nigeria talks to World Report about Nigeria’s financial sector and the investment opportunities – particularly in infrastructure and agriculture – that abound in the West African nation “that has the potential to outpace every other country within the developing world.”
Regarding the current situation in Nigeria’s economy, many of the key economies of the world have slowed: the United States is down to 2% growth, Brazil down to 2% growth. In 2011 Nigeria grew by 7.4%. Dr Okonjo-Iweala has said that we need to look at the revenue streams, where we are too dependent on oil and gas for our revenue in this country. How would you like to see the Nigerian economy diversify? And, as you control one of Nigeria's key institutions, into what areas are you looking to give access to funding to create growth?
Stephen Onasanya: I think that when you look at the performance of the Nigerian economy over the past 10 years, you see the growth rate coming down from 10% in about 2003 to 7% or thereabouts now. And if you look at the environment in which these growth rates have been delivered without adequate infrastructure, it then tends to tell you that if we are able to fix the issue of infrastructure, and other internal obstacles that are slowing us down, Nigeria is one country that has the potential to outpace every other country within the developing world. 
The reason I say this is that agriculture today, which accounts for about 45% of our GDP, is only able to attract about 2% of funding from the formal financial services sector. In addition, infrastructure is lacking in Nigeria today, but to me we see this as an opportunity for foreign direct investment. There is no doubt in our minds that if we are able to take advantage of the potential that exists for investors to put money into the development of our infrastructure, it helps us to attract foreign direct investment. It also helps in building a solid base for the further growth of the Nigerian economy. So I think that the potential is enormous. 
Also, if you look at the population it is around 160 million today – and it is a very intelligent and highly knowledgeable set of people. So our challenge is to create the right enabling environment for foreign investors, or even local investors, in which to put money.

If we are able to get that balance of where to spend government resources, and at what point you encourage private sector investment, either local or foreign investors, the Nigerian economy will boom. 
If you consider the 7% growth that we have been able to achieve, we have done it without power. Imagine a United Kingdom or United States government or economy without power, or operating at the level of power that is available in Nigeria: it would just be at a standstill. For us, as relieved as we are to be able to achieve that kind of growth rate, 7%, without power and other basic infrastructure, is an indicator of what can be achieved. All we need to be able to do is get those supporting structures right. I think that steps are now being taken to fix those things. The government is looking to be part of the expansion and see the potential that exists here realised. 
Infrastructure and development are going to link up with every aspect of the country’s financial transformation and be a lifeline for the growth and development of the Nigerian economy. 
Another priority is fixing the issues of the legal and administrative framework to ensure that conflict and administrative omissions are minimised, thus strengthening the belief of foreign investors in the Nigerian system. If we fix our structure properly, it will give us the opportunity to attract foreign direct investment into Nigeria and also enable foreign nationals to participate in the Nigerian economy. 
There are a few things that need to be fixed, but for me, once we have done those things, the potential is enormous in agriculture and in infrastructure generally. 
Within infrastructure, I would say power and transportation are very, very important. We have seen how a regulatory framework and proper alignment of priorities between the government and the private sector have yielded results in the telecommunications industry. People who have invested in that industry would tell you that the industry is better for it. So if we are able to fix those things along the lines of what we did in telecommunications, other sectors would become much more attractive than they are today.
Within the Nigerian banking sector at the moment there is quite an air of criticism surrounding lending institutions. Obviously with the monetary policy rate at 12% and the maximum lending rate up in the low to mid-20s, it means that some institutions, and especially institutions outside the blue-chip companies, are not able to present bankable projects that banks will support. As an institution, how would you find the current lending environment? Is it the case that First Bank is holding back funding? And what seems to be the disconnect between these companies that are calling out for financing and what is actually being released to them?
I think that you cannot take the lending rate outside the environment in which you operate. There are factors that go into the determination of what optimum lending rates should be, one of which is inflation. An economy cannot thrive in the right direction if you do not have positive net interest rates. So I think that the first thing that we need to do before we start complaining about high interest rates is to look at the components of inflation. So non-cash inflation continues to remain at 11% or thereabouts, and interest rates cannot be less than what they are today, a minimum of 12%, because we know that the MPR is at 12%. Is it high or is it low? We have to be very careful in making a judgement call. In the United Kingdom, the inflation rate is 2.2%. So if you look at the inflation rate there and you look at lending rates, the margin there is quite high. And the margin that you have in Nigeria, if you look at the inflation rate and the lending rate, is still lower than the margins that you have in those other kinds of environments. That is putting it into perspective. 
You should also understand that lending rates are a bit high but the returns are also very high in Nigeria as well. So if you operate in an environment where the yields are generally high, it is normal to see interest rate that is also higher than what you would see in developed nations. This is a major characteristic of growing economies; if you look at Brazil or Egypt, those countries at some point in their development have had interest rates that are high. 
At some point when we get all the parts of the equation together, then naturally interest rates will begin to come down. When there is that balance between the fiscal authorities and the monetary authorities, you strike a positive where interest rates then begin to come down. Is it a disincentive today for lending or borrowing on the part of the customers? The fact is that there are so many reasons today why access to finance for the small and medium scale enterprises is a problem. I do not think that they are bothered today at this level about interest rates; they are much more worried about their ability to access banking or financial institution financing, which they are not able to because of so many factors. A major part of which is that the cost of doing business makes it expensive for them to be profitable. Tariffs are high with public infrastructure, business costs are even, when every single company in Nigeria today is almost running as a local government authority providing its power, water and so on. If you are able to deal with these things they have a multiplier effect from two perspectives. Firstly, it reduces the cost of business for the borrower. Secondly, it also reduces the cost of doing business for the banks. 
As we speak now you can hear the sound of generators. We run on diesel generators so it is expensive. If you are able to fix the basic infrastructure it naturally has the ability to bring down costs. If costs are down, banks pass that on to their customers and the customers also become more profitable. So the reason why they are not able to attract lending is not because banks are not willing to lend to them. It is because when you subject the financials of a lot of small and medium-scale enterprises to detailed financial analysis, not many of them are profitable. That explains why they are not able to attract funding from the banks, not because the associated interest is very high. 
This is unfortunate because they would have to be the engine for growth in an economy like Nigeria. Look at China and so on. In addition there is the need to address the issue of security for lending. By law, banks are not allowed to lend unsecured to businesses. A lot of these businesses that we are talking about do not have, for instance, legal title to the properties from which they operate. So they are not able to pledge legally acceptable title documents to secure their lending. Now is that a problem for the banks to fix? It is difficult; we can work with the government but the government is not handling this factor very well. 
So a lot of factors that we put in place are there because we are doing business and trying to resolve the requirements towards security of lending by small and medium-scale enterprises. It is also for transparency, and in the way that the administration of reports and so on are carried out. If you solve all these problems it removes the issue of impediments to credit on the side of the borrowing sector.
I suppose it is the chicken and the egg situation in terms of how finance will be released to small and medium-sized enterprises. Hopefully lending will increase in this area and money will move away from fixed-income securities. However another issue that is playing out in the banking sector at the moment is financial inclusion and the idea of going out, educating people, and getting them involved with their local branches. I think that it is fair to say, and credit must go to First Bank, that nobody has been as active as you have in this; your recent customer engagement in Abuja Forum was a success. First Bank seems to be leading the way in terms of reaching out to customers and new customers, and providing new innovative and creative ways of banking. Is that a big part of your ethos here? It is something that we have seen again and again.
We pride ourselves that we are not just in business to make profits, but we also believe that we owe the Nigerian people something. We are a brand that is well loved and we believe we need to give back to society part of what we have gained from society. Do not forget that First Bank started out and was at some point fulfilling the role of the Central Bank not just for Nigeria but for the whole of colonial West Africa. So on that side we see it as a social responsibility to drive financial inclusion. 
However, in addition to that, we believe we are a mass-market bank. We have a reputation for being the natural first choice of bank for people. The only reason that we do not control 100% of the market is simply because on our part there are a few things that we needed to have done to improve our services and make ourselves much more agreeable, which we are trying to sort out. 
So, we believe that as the banking crisis in Nigeria is being resolved, competition becomes tougher. We believe that the only way we can continue to maintain a strong hold on our traditional segment of the market is to make sure that we put everything into that market segment to drive national innovation and expand our market share. 
The difference between First Bank and most other banks – and a major factor behind our success – is the fact that we are able to bank the masses and offer them banking services when other banks do not want them. So our strategy for national inclusion is not just to support the Nigerian economy. It is also to make sure that we continue to increase our share of the purse at the retail end of the market by driving financial inclusion. We are looking at finding ways of bringing them back into the financial system, either through formal banking or through mobile banking and payments, which is really what our objective has been. 
One area in which we believe that this is possibly more important than anything else is that as competition becomes tougher, banks are now taking their eyes a little bit off the top end of the market, which is becoming very competitive, and finding ways of breaking into First Bank’s traditional market, the mass market and so on. They are also looking at how they can bring these people out of their comfort zones, who are typically using First Bank. They are trying to make themselves attractive to that segment of the market so we have to do a lot more than every other bank if we want to retain our market share in that mass market. 
These are the factors that drive our financial inclusion strategy, in addition, of course, to the need to support government and the Central Bank of Nigeria. But we see the business opportunities we are making allowing us to be able to solve problems for the government and the banking community.
Definitely one area that you have used very effectively to do this is technology. Last year you were voted the most innovative bank in Africa at the African Banker Awards, which is a huge honour and no small achievement. How important is technology, and how embracing as an institution are you with technology in new forms? You mentioned mobile banking, etc.
If you have the kind of customer base that we have, you have to take a position. Either you drive them away because they are expensive to serve using the weaker, traditional methods of banking, or you find cheaper ways of servicing them. Unfortunately what most of our competitors are doing is creating unnecessary barriers to entry so that a lot of people we are talking about are deliberately excluded because some banks just think that they are a nuisance. 
If you study and look at the statistics of the major retail banks operating around the world, they tend to have cost structures that are higher than those of niche players who just choose certain segments of the market, because it is a lot more expensive to bank those people. We too have done studies and decided that we will not throw away the strategic strength of First Bank. What we will do is find cheaper ways of servicing them so that they do not have to have physical contact with the whole banking environment. 
So we have no choice by way of our legacy as people’s first choice bank other than to continuously tinker with the way we serve them. We constantly look for ways to let them access banking services using technology. The myth around text serving or not was broken with the introduction of GSM telephone technology. We found out when we supplied it that the most illiterate set of people are able to make their own calls without assistance, and some of them send text messages. So that removed the pressure that we had that they are not totally conversant because they started using technology. We then decided to increase the use of technology as a means of serving them and it has worked out very well for us. If you look at our statistics you will see that the number of ATMs that we have deployed has increased to about 1,000. 
We have also brought in and revitalised our telephone banking and our mobile banking. That is mobile banking using mobile phones for basic banking transactions. This is different from mobile payment services. They both leverage mobile phones but they are two different things. The mobile banking platform enables you to complete your transactions on your First Bank accounts. The mobile payment solution does not necessarily mean that you would have an account in the bank. So they are two different types of customers and that has helped us. 
We have done a lot and we have also tried deliberately to do what I call a “channel migration strategy” that intentionally profiles the different customer segments and migrates them to the appropriate channel. That makes it effective for us to serve them at less cost and the customer does not see it as being pushed away. The customer in fact sees it from a different perspective that he is being served in line with his banking needs. What we try to do with everything that we do is to allow the customer to get that service without any form of intervention or interaction with a human being as much as possible. If they can do it on their own they ought to do it on their own without you having to oversee every step to provide it. 
Every service that we are able to link to a provider with as little physical contact as possible we provide to our customers. And we have been able to reduce our service costs significantly in the last three years simply by improving on that technology. 
In addition to making it cheaper for us to serve the customers, it has also opened us up and endeared us to the young and upwardly mobile segment of the market, who traditionally would not want to come into a bank. So it has made our service delivery more efficient and also attractive to the youth simply because we revitalised these platforms. We do track the number of new accounts that we open. We trace different age brackets and I can tell you that today we are attracting more of that youth market segment into the bank simply because of the tweaking around that we have done on our various service platforms.
This tweaking of strategy and leadership really came to the fore in 2011 in your results, such as 27.6% gross earnings increase, 45.6% operating income increase and huge control of costs, as well as very strong risk management at 2.6% on non-performing loans. Fantastic control. How have you managed, since your inception to office in 2009 and over those two roller-coaster years post crisis to achieve this? How have you managed to put the bank on such a stable path and what are your plans for the future of First Bank?
You need to appreciate the fact that the present management who took over in 2009 had been well prepared for the assignment. I joined the bank in 1994 so I have had the benefit of experience in looking at what the issues are. Those growth numbers that you saw from 2009 to date were not accidental. They were the outcomes of clearly attributed and documented strategies to deal with the major issues of the bank. I think that the first two or three years were a growth and modernisation period. But I need to make you aware that in as much as we would always drive growth, profitability, service, technology, and so on, we could have done a lot better than we have done to date. This is from the fact that in driving all of this we still insist on driving the business through sustainable banking policies and principles. So no matter how attractive and profitable a transaction is, if it is not a transaction that can stand the test of close scrutiny we would walk away from it. So we are never desperate to do it and we are never desperate to win a customer if that customer has the kind of profile that we do not want to have. Hence, things have been good but they could have been better, profits could have been higher, but at what cost? We would never ever sacrifice the integrity of this institution. 
So all of those growth results that you have seen were achieved with a very, very robust risk management framework and very good, uncompromising corporate governance. That is very important. In those days we used to see the likes of those other banks that eventually got into trouble and we used to see the kind of numbers they were posting. We knew the risks that they were taking but we deliberately chose not to follow them. That is the reason why, up to today, we remain the number one bank across the different age brackets. At every point in time we have always been able to weather the storm, blitz our competitors and still come out as the number one bank. 
Back to your question about how we have been able to do this. I have mentioned some of the things that we did. For us to remain a viable bank after over a century simply means that we must have been doing certain things right. Moreover we have been able to pass it on from one generation to the next. We went on with a strategy to revitalise the bank and we changed the operating system, by which I mean the operating strategy. We changed from a geographically segmented institution into a market-segmented bank. In the past business managers were responsible for geographic locations so – irrespective of the kind of business that existed in that location – one person was responsible. 
Now we have four-fold specialisation by creating separate banks within the bank. We have a separate corporate bank, a separate institutional bank, a separate public sector bank, and a private bank. In each of those four separate banks our objective is to be the best in Nigeria. For instance, having achieved that in the past year we have shifted the goal posts. Competitors now are benchmarked not against the best local banks, but against the best banks that exist outside Nigeria, such as in South Africa. 
In addition to that, we believe that no matter how specialised a niche player is in Nigeria, we will be better than that niche player. That has helped us in keeping our customers because we now have a value proposition that is stronger than we used to have. We are able to develop market knowledge and understanding and therefore offer superior product solutions and services to the market. 
We also looked at our products and service offers and decided that we would benchmark against the best, so we changed the way in which our branches are structured. In the past we had a branch manager who was responsible for all businesses and customer service. The tendency therefore was that the branch manager would only focus on the things upon which he was being measured and that was profitability. This left customer services behind. We changed this simply by making our branches service oriented, service focused. They were not measured by profitability, which became somebody else’s responsibility, but by the quality of the service that they could offer. And we also chose to benchmark ourselves against the industry rating of the best customer-service banks to make sure that we improved our ranking along with our service. 
So a combination of these factors, including an improved workforce, a modernised workforce also helped. We deliberately brought down the average age of the workforce from over 45 years to about 35 and that also helped. These combined factors as well as our ability to ingrain a corporate culture into our staff and a culture of service excellence, and we have seen the results, so it is not accidental.
You spoke at the start of the interview about the opportunities that exist and obviously touched on power generation and electrification in Nigeria. I am sure that at the moment there has never been as much strain on your reserves, on the liquidity of the bank, to put them to work on projects. I am sure that every day you have a headache trying to choose where to put your money. In terms of what our United Kingdom investors can do, we want them to come, we want them to partner with First Bank. Can you tell us why they should come here? Why is this the institution they should (a) work with when they land on the ground here and (b) be looking to invest in, on the Nigerian Stock Exchange?
Given the way that we are structured, we have been able to build partnerships with our customers. There is hardly any big name in the Nigerian market today that is not a customer of First Bank. We are talking about a share of that customer's wallet. So we have the credibility of a financial institution that is resilient, and customers therefore tend to believe us first and foremost – and that is important. 
In addition we have the biggest balance sheet today in the Nigerian banking sector, and size matters. That is why we would never ever compromise on growth and size. The kind of transactions we are talking about when we are talking about foreign investors coming to Nigeria: what are the things that they are looking for? 
Firstly, they are looking for a local partner, a bank that is respected. If they are looking for that it has got to be First Bank. Secondly, they are looking for a local bank that would also be able to have the financial means to support them. Do not forget that it is the condition precedent for most financial institutions coming into a new environment to arrive on the back of the guarantee of a local bank. That is basic. There is no foreign institution from the United Kingdom or any other international institution that can do this.

They will always rely on a local bank as a guarantee because they do not know the market and the local bank does. We know this market more than any other person through our history and by the fact that we have a huge and reliable customer base. 
The worth of the guarantee of the local bank is highly dependent on the quality and strength of the institution that is providing that financing. So what you will find today is that naturally when people are coming into Nigeria they are always looking out for First Bank because they know that we have integrity. We have the financials. We can put our balance sheet on the table and we have always done that. 
Therefore I would say that through our history and our dominant position as the market leader, not just in terms of our balance sheet but by way of reputation, we are the natural, first choice point of contact. 
More than this, First Bank’s subsidiary in the United Kingdom is the biggest and the most efficient Nigerian banking institution operating out of the United Kingdom. So you have the added advantage of doing your transactions, originating your transactions in London in an FSA-regulated environment. This gives you convenience, and you then happen to be dealing with a 100% Nigerian-owned bank that is the leading Nigerian institution, the most efficient and biggest in the world by balance sheet, deposits and assets, which also has people who understand how to structure transactions because they are close to the customer – no matter what industry that customer is coming from – and it makes doing business easier. We have industry experts in Nigeria who from day one will assist in structuring and packaging transactions in such a way that it is a win-win situation both for the foreign investor, for the Nigerian entity and for First Bank.
Excellent, it sounds like a match made in heaven. We talked earlier about Minister of Trade and Investment Olusegun Aganga and UK Business Secretary Vince Cable, and the push to boost FDI into the country, doubling it in by 2014. I believe that there was a summit around the Olympics that was well attended by Nigerians from every walks of the public and private sectors. Are you seeing an explosion of this interest from the United Kingdom at the moment? In terms of the opportunities that exist here for United Kingdom investors, where do you see the huge potential that people, from the United Kingdom especially, should be looking to aim at directly?

My honest opinion is that before investors move out of their comfort zone, they must see something that is better and more attractive in the new environment. We should not expect that foreign investors will take their funds out of their own environment unless we have superior opportunities. So one of the things that we need to fix first and foremost is the idea that any investor takes decisions to invest based on sentiments. 
Ipso facto we have to be sure that we fix our own environment and make sure that whatever we are asking them to come and invest in will give them returns. Some of these returns will be financial, mostly financial, but in some few cases not necessarily all financial. Aside from that it is more attractive for them to invest here. That is always my advice to a banker, he is not going to do it by sentiment; he has got to do it by what it might get him. And they are typically very characteristically mutual. 
The good news is that we have been able to show that irrespective of what the world reports about Nigeria, the Nigeria that we know, that we live in, is a Nigeria that is full of opportunities. It is not the Nigeria that you see on CNN or the BBC, and what bothers me is that unfortunately the many institutions that have come into Nigeria from outside the country who have done well have deliberately decided not to tell the true story. They do not encourage some of their own people to come in and share the booty from here. I keep challenging them that if that is the case then why are they not pulling out? They keep referring to Boko Haram; they exist, but they are overplayed. So for me the opportunities still remain in Nigeria. And the growth numbers for the United Kingdom for the first time in one year I think that there is a small, very slight positive number. 
This is an economy where you have 160 million people who are yearning for good services and are willing and ready to pay for them. There are tremendous opportunities in Nigeria. The mere fact that we are at this very early stage of our development and modernisation means that with very little investment the potential exists for high returns. If you look at the kind of returns being generated by foreign investors in Nigeria, if you move into the right sort of industry, it is far superior to what you can get in your own environment in the United Kingdom. 
Labour is cheap. The environment is right today because anybody coming in has what you call the “early mover advantage” in any of those big infrastructure or agriculture sectors. About 35% of Nigeria’s arable land is cultivated today. The food production that we have is basically based on subsistence level of farming so the potential there is so enormous. You also have a banking environment where the banks are very professional and can assist you in raising funds, not just from Nigeria but from the rest of the world. I think that any organisation that has the desire to spread out of the over-saturated investment environment in the so-called developed nations, who ignores Nigeria at this stage of our own development, does so at their own peril. This is the country to be in.
As Dr Ngozi Okonjo-Iweala says, “If you are not in Nigeria you are not in Africa.”
Sure. The report I read about Dr Ngozi's speech also predicted that in the next few years Nigeria will surpass South Africa in terms of size of the economy. South Africa is the biggest economy in Africa. Even by the admission of the South Africans themselves, they are now saying the way Nigeria is going it will surpass South Africa in the not too distant future and be the biggest economy in the whole of Africa.
I think that Jim O'Neill from Goldman Sachs has said the same thing. We hope so. On a personal level, you have been working in banking here since 1983, I think with Wema Bank. What is it that motivates you about the challenge of First Bank?
It is something that I do not have to think twice about. I was financial controller at First Bank and I saw a lot of things; an institution that was held down in a state of inertia. With inertia what it takes is for somebody to work it off. Everything that we required to beat the best was available within the system – it just needed somebody who understood what those issues were and could put that stimulus into the system to wake it up. 
What motivates me is the ability to put things right and see the result of this giant waking up and becoming a major threat to the rest of the industry. If you speak with all the executives in Nigeria today in the banking area, they will tell you that their major threat today is First Bank. If you go back and look at our peers, where are they today? I do not want to mention names, but we have been able to single this institution out and make it much more relevant than all our peers from those days who were the major threats to First Bank about 30 years ago. None of them are close to where First Bank is today. 
So that is what motivates me and I am very happy that I have been able to bring a lot, at least in setting the standard, developing the framework and laying the foundation that we are beginning to see. What we are seeing today is not the maximum potential of First Bank; we are evolving. By the time we wake up fully the industry is in trouble.
One final question: what is the most important skill that you have learned over the past 20-something years that allowed you to put yourself in this position right now? What is the skill that is most necessary?
Institutional knowledge is key in turning around any entity. I do not think that an outsider can do the job in the best way that has helped. The reason is very simple. Consultants will throw so many things on your plate and you will be in trouble if you do not have the institutional knowledge to know what will and will not work for your organisation. That to me is fundamental, it is key.