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Economic Crunch May Force $25bn Capital Flight As Banks Plan African Expansion

Posted: May 8, 2016 at 5:49 am   /   by   /   comments (1)

 

NICHOLAS UWERUNONYE Abuja

 

No less than 25 percent of the financial assets of Nigeria’s top banks will find its way into other African economies as more banks are set to deepen presence in the continent after United Bank of Africa (UBA) made announcement earlier in the week to increase presence in Africa.

Rather than elicit optimism, players in the money industry tend to worry over what appears to be a divestment of fortunes from the country into setting up new operations in other African countries.

The belief, according to Independent’s investigation, is that the rush into new African frontiers has more to do with what appears to be the downturn in the economy and unclear policy direction on the part of the Federal Government.

GTB, FirstBank, Ecobank, Zenith Bank, Access Bank, UBA, Diamond Bank and Skye Bank, designated systemically important financial institutions (SIFIs) by the Central Bank of Nigeria (CBN) with combined financial asset of near $100 billion may soon be divested of $25 billion of the money in the bigger expansion bid envisaged from the Nigerian banks.

Though experts say that the divestment may be temporary with guaranteed recoupment of the capital, the immediate implication for the thinkers is that the move may well confirm that the economy is in further decline.

“The move by UBA and some other banks that will soon follow is meant to spread the risk in doing business in Nigeria. This is so going by the slow rate of economic activities in Nigeria,” explained Alaba Olusemore, former top banker with FirstBank, Fellow, the Chartered Institute of Bankers of Nigeria (CIBN) and monetary policy analyst.

Facts and statistics support Olusemore’s point of view.

For instance, inflow of foreign investments or capital importation in Nigeria has sunk to its lowest level since 2007, hitting $710 million in the first quarter of 2016. These much can be gleaned from the executive summary of Nigerian capital importation report. National Bureau of Statistics (NBS) recently said there was a decline of 73.79 percent in capital inflow in the first quarter of 2016, when compared to the same time in 2015.

“The total value of capital imported into Nigeria in the first quarter of 2016 was $710.97 million, the lowest level since the series began in 2007,” the report read.

“This represents a decline of 54.34 percent since the final quarter of 2015, and a year-on-year decline of 73.79 percent. Both the quarterly and year-on-year declines were also the lowest recorded since the series began.

“As a result of these changes, total capital importation has fallen by 89.13 percent since its peak level in the third quarter of 2014.”

The report further revealed that the JP Morgan exclusion of Nigeria from its bond indexes and current foreign exchange regime have been areas of concern, driving investors to keep their money out of the economy.

“The scale of the decline in capital importation in the first quarter of 2016 is symptomatic of the challenging period that the Nigerian economy is going through following the fall in crude oil prices.

“Investors may be concerned about whether or not they will be able to repatriate the earnings from their investments, given the current controls on the exchange rate,” the report added.

The Nigerian economy can be said to be officially experiencing its lowest growth in about two decades, with every economic indicator giving off red signals.

Inflation is at new high, investments at new lows, GDP growth at 16-year low, with the IMF predicting a new low in 2016.

Contrastively, economies in the sub-Sahara Africa have better projections. Where IMF and World Bank put Nigeria’s projected growth at a little above two percent, the sub-region, as believed by the global finance institution, may witness about 4.5 percent growth.

Olusemore, explaining the trend, added that the other African countries have shown remarkable resilience and looked to be beyond their crisis.

“The insecurity in Nigeria and the slow economy is making investors and bankers nervous. It is not the same story in countries like Angola, Liberia, Sierra Leon and so on which were once war torn countries. This explains why there is move to expand as a means of spreading risks,” he said.

Another reason why more banks may be looking to expansion if they fall into the CBN categorized international bank is the bid to meet the June 2016 deadline for recapitalisation. Last year, CBN directed some SIFI banks considered too big to fail that are short of capital to submit recapitalisation plans. The CBN, at the time, suggested that a few undisclosed banks do not meet the minimum capital adequacy ratio (CAR) of 10 percent and 15 percent for regional/national and international banks, respectively. The banks were given three months, till June 13, 2015, to submit recapitalisation plans and till June 30, 2016 to implement same.

UBA on Tuesday announced plans to increase its presence in Africa outside Nigeria to 25 countries from 18. It also plans to inject capital into its subsidiaries in Kenya, Tanzania and Uganda. According to Tony Elumelu, UBA chairman, the bank was gearing up with a view to, according to him, “harnessing the potential represented by the wider African economy through its expansion plans”.

“Our intention is to be the leader in African financial services,” Elumelu said on the sidelines of a news conference in Lagos late on Tuesday. UBA, one of Nigeria’s largest banks with more than 700 branches, has subsidiaries across Africa in countries such as Ghana and Ivory Coast in the west, Kenya and Uganda in the east and Mozambique and Zambia in the south. It also has offices in London and New York. The bank’s operations in the 18 African countries outside Nigeria now contribute more than 25 percent to group operating revenue, Elumelu said.

Last year, UBA’s pretax profit rose 22 percent from a year earlier to N68.5 billion while gross earnings climbed 10 percent to N315 billion. Insiders in the bank say that a significant share of its Nigerian investment may go into setting up new operations in other economies.

Augustine Onwudinjo, former branch manager, Access Bank, now financial consultant, believes that there would be initial divestment from Nigeria’s economy. “It is not quite certain how much we are looking at but there will be divestment to be used as initial capital outlay for the expansion,” Onwudinjo said.

Onwundijo, however, stated that the bank in the long run will be the gainer. This is because, according to him, UBA will have fresher source of forex because most of its transactions in the new branches outside the country will be dollarized.

He particularly foresees other banks copying suite in the face of the grim economic situation in the country.

Explaining further, Olusemore sees other banks, especially SIFI, following suit in the days ahead. “We have seen expansion in other banks like GTB and Diamond Bank. I Expect FirstBank to do the same soon,” he said.

 

 

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