Four-point agenda for Nige­rian dig­i­tal fi­nance in 2018

The dig­i­tal econ­omy will help the coun­try un­lock in­no­va­tion, job cre­ation, and link­age to the global sup­ply chain.

Financial Nigeria Magazine - - Contents - Tunde Popoola, CEO, CRC Credit Bureau

Af­ter the Nige­rian eco­nomic down­turn of the pre­ced­ing two years, the re­cov­ery, which be­gan in Q2 2017, is ex­pected to gain trac­tion in 2018. One of the im­por­tant lessons of the eco­nomic melt­down is that the econ­omy must be re­silient to ex­ter­nal shock in the new growth cy­cle.

To re­alise a more ro­bust growth, im­prove­ment in credit pen­e­tra­tion to the real sec­tors and the SMEs is im­per­a­tive. This means the in­ter­me­di­a­tion role of the bank­ing sec­tor will be cru­cial in 2018 and go­ing for­ward. To op­ti­mise the role of bank­ing, or more pre­cisely fi­nanc­ing, we have to un­lock dig­i­tal fi­nance.

The wider Nige­rian dig­i­tal econ­omy must also be­come a key fron­tier in the quest for eco­nomic di­ver­si­fi­ca­tion. The dig­i­tal econ­omy will help the coun­try un­lock in­no­va­tion, job cre­ation, and link­age to the global sup­ply chain. To make this a re­al­ity, as op­posed to the usual pipe dream, I'm rais­ing a four-point agenda for Nige­rian dig­i­tal fi­nance in 2018.

1. Prime the credit bu­reaux for SME lend­ing

The Credit Re­port­ing Act, 2017 and the Se­cured Trans­ac­tions in Mov­able As­sets Act, 2017 – oth­er­wise known as the Col­lat­eral Reg­istry Act – were signed into law in March. The Credit Re­port­ing Act pro­vides the le­gal back­ing for the credit bu­reaux (CBx) who sup­ply the lenders with bor­row­ers' credit in­for­ma­tion. On its part, the Col­lat­eral Reg­istry Act sup­ports the reg­is­tra­tion of the as­sets pro­vided with

loan ap­pli­ca­tions and the ver­i­fi­ca­tion of the sta­tus of such as­sets in pro­cess­ing new loans.

These two leg­is­la­tions are mu­tu­al­lyre­in­forc­ing. They are ex­pected to sup­port more se­cured lend­ing and at the same time make bor­row­ers more suc­cess­ful with their loan ap­pli­ca­tions. But even be­fore the leg­isla­tive en­act­ments, there has been the no­tion that the credit in­dus­try has been sig­nif­i­cantly boosted by the op­er­a­tions of the CBx, namely CRC Credit Bureau, Credit Reg­istry Bureau, and XDS Credit Bureau.

Ac­cord­ing to the Cen­tral Bank of Nige­ria (CBN), the num­ber of bor­row­ers reg­is­tered by the CBx reached 29 mil­lion in 2015. The CEO of CRC Credit Bureau, Tunde Popoola, said the CBx had helped to raise the value of loans granted in Nige­ria from N7 tril­lion in 2014 to N12 tril­lion in 2016. He also said the CBx helped to re­duce non-per­form­ing loans (NPLs) from 24 per­cent in 2012 to 4.52 per­cent in 2014.

How­ever, the NPLs data may be the clear­est in­di­ca­tion that the cel­e­bra­tion of the suc­cesses of the CBx might have been too early. Ac­cord­ing to the IMF, the NPLs of the banks grew to 15 per­cent by Q2 2017.

Over the last two years, credit mar­ket ex­pan­sion has been con­strained by CBN's tight mon­e­tary pol­icy and the huge deficit fi­nanc­ing pro­gramme of the fed­eral gov­ern­ment. And a 2016 re­port by the Bankers' Com­mit­tee shows that 100 com­pa­nies ac­counted for 75 per­cent of loans granted by the Nige­rian banks. There­fore, it would ap­pear that the eco­nomic cy­cle and some long­stand­ing is­sues against lend­ing to the SMEs have con­tin­ued to ex­ert more in­flu­ence on the credit mar­ket than the role play of the CBx.

To re­verse this trend, the CBN needs to start en­forc­ing its 2008 di­rec­tive to the banks, that they must use credit re­ports supplied by the credit bu­reaux in pro­cess­ing loan ap­pli­ca­tions. The di­rec­tive was deemed to be cru­cial for im­prov­ing credit ac­cess for the SMEs ten years ago. The same is still true to­day.

The use of credit re­ports of the CBx will also help im­prove their cash­flows, en­sur­ing they can con­tinue to in­no­vate and in­vest in new prod­ucts. To un­der­score the pos­si­ble preva­lence of fi­nan­cial stress in the CBx, one of them had to raise ad­di­tional cap­i­tal of N500 mil­lion through a rights is­sue in 2017.

The credit bu­reaux need to be primed to help im­prove lend­ing to the real sec­tors and the SMEs, es­pe­cially as the CBN in­evitably starts to loosen mon­e­tary pol­icy in the course of the year.

2. Pro­vide reg­u­la­tory frame­work for crowd­fund­ing

In con­tem­po­rary and func­tional terms, crowd­fund­ing means rais­ing money from a large num­ber of peo­ple, us­ing the dig­i­tal plat­forms. The “large” num­ber of peo­ple are reached with the aid of tech­nol­ogy. But tra­di­tion­ally, crowd­fund­ing for busi­nesses and char­i­ta­ble causes have been pro­vided by fam­ily mem­bers, friends, com­mu­ni­ties and passers-by, as in street beg­ging.

A mod­ern crowd­fund­ing in­dus­try has par­tially taken off in the coun­try. The Se­cu­ri­ties and Ex­change Com­mis­sion (SEC) says equity-crowd­fund­ing is out­lawed un­til it puts in place a reg­u­la­tory frame­work for it. In the mean­time, the do­na­tion seg­ment has kept alive a mar­ket that can play an im­por­tant role in fi­nanc­ing in­no­va­tion and small busi­nesses in the ab­sence of ven­ture cap­i­tal funds.

In mod­ernising the Nige­rian crowd­fund­ing mar­ket, po­lit­i­cal do­na­tion has been the ele­phant in the room. But po­lit­i­cal do­na­tion is big busi­ness, not only in Nige­ria but also in the United States, the self-pro­claimed cham­pion of democ­racy. In Nige­ria, politi­cians “in­vest” in pol­i­tics. If the “in­vest­ment” is made in self­spon­sor­ship, the elected politi­cians would then try to gen­er­ate “re­turns” by em­bez­zling pub­lic funds. Such funds are also “rein­vested” into their cam­paigns for re-elec­tion, thus per­pet­u­at­ing a vi­cious cy­cle of pub­lic sec­tor cor­rup­tion.

The dys­func­tions of the un­der­ground po­lit­i­cal do­na­tion in­dus­try in Nige­ria notwith­stand­ing, crowd­fund­ing for po­lit­i­cal causes can help well-mean­ing po­lit­i­cal of­fice as­pi­rants to scale the high fi­nan­cial hur­dle they strug­gle with. This bar­rier has kept many Nige­ri­ans of mod­est means, but who pos­sess tech­no­cratic com­pe­tence to im­prove the qual­ity of pub­lic gover­nance, from seek­ing elec­tion into pub­lic of­fices. Broad­en­ing the base of po­lit­i­cal fi­nanc­ing will ex­pand the po­lit­i­cal stake­hold­ing, which is a ne­ces­sity in im­prov­ing the qual­ity of gover­nance.

2018 would make it two years since the now-sus­pended Di­rec­tor Gen­eral of SEC, Mounir Gwarzo, said he ac­knowl­edged the grow­ing in­ter­ests among Nige­ri­ans to use crowd­fund­ing to raise fund. SEC needs to de­liver the needed reg­u­la­tory frame­work

this year. Ad­vo­ca­cies for the en­abling reg­u­la­tion should re­main stri­dent un­til that hap­pens.

3.Pro­vide reg­u­la­tory clar­ity on

cryp­tocur­rency

Un­til mid-De­cem­ber, an­a­lysts had looked to 2018 for an­swers to the ques­tions on whether Bit­coin could sus­tain its up­ward price move­ment over the medium term. From $997 on Jan­uary 1, 2017 the val­u­a­tion of Bit­coin rose very sharply to $19,343 on De­cem­ber 16th, ac­cord­ing to data by Coin­desk. That was 1,838 per­cent rate of re­turn for in­vestors in the dig­i­tal cur­rency.

How­ever, Bit­coin ex­pe­ri­enced a price col­lapse in the third week of De­cem­ber. Since par­ing its dra­matic loss of value, the cryp­tocur­rency has strug­gled to sus­tain an up­ward trend, end­ing the year at $13,860.14.

Dig­i­tal cur­ren­cies, Bit­coin be­ing the run­away leader, will re­main in the reck­on­ing of in­vestors in 2018. Bit­coin's mar­ket cap­i­tal­i­sa­tion dropped from its peak val­u­a­tion of $327 bil­lion in midDe­cem­ber to $224 bil­lion at the end of the year. But the to­tal mar­ket cap­i­tal­i­sa­tion of the cryp­tocur­ren­cies reached $593 bil­lion on New Year's Eve.

Dig­i­tal cur­rency has a sym­bolic im­por­tance for Nige­ria, and in­deed the African con­ti­nent. Africa is ex­pected to lever­age the dig­i­tal econ­omy to close its in­no­va­tion gap with the ad­vanced economies. The con­ti­nent is also ex­pected to har­ness the dig­i­tal econ­omy to de­velop eco­nomic so­phis­ti­ca­tion that would en­able it par­tic­i­pate more in global trade.

How­ever, Nige­ria is play­ing the cau­tious game with cryp­tocur­rency. Last year, the CBN banned the banks from in­vest­ing in, or trad­ing, cryp­tocur­ren­cies, un­til fur­ther no­tice. There is, there­fore, a reg­u­la­tory la­cuna in the coun­try for dig­i­tal cur­rency, in­stead of in­no­va­tion and lead­er­ship.

To be clear, cryp­tocur­rency is a metaphor for Nige­ria in fos­ter­ing a dig­i­tal econ­omy. Emerg­ing markets that are thriv­ing on tech­nol­ogy and dig­i­tal­iza­tion, in­clud­ing China, South Korea and In­dia, are not sim­ply ten­ta­tive about dig­i­tal cur­rency. They have em­braced its op­por­tu­ni­ties while ad­dress­ing its risks. If Nige­ria con­tin­ues to be fix­ated on the risk, we may also be a lag­gard in de­vel­op­ing use-cases for Blockchain – the land­mark tech­nol­ogy that en­ables trans­ac­tions made with Bit­coin or other cryp­tocur­ren­cies to be pub­licly recorded in a chrono­log­i­cal or­der. Many as­tute ob­servers have seen the Blockchain as a ma­jor tech­no­log­i­cal in­no­va­tion that will power the fi­nan­cial markets in the fu­ture that has al­ready be­gun.

In 2018, the CBN should at least re­move the ban on cryp­tocur­rency. Ban­ning is sim­ply a crude reg­u­la­tory tool. Har­vard eco­nom­ics pro­fes­sor, Ken­neth Ro­goff, re­cently said: “The long his­tory of cur­rency tells us that what the pri­vate sec­tor in­no­vates, the state even­tu­ally reg­u­lates and ap­pro­pri­ates – and there is no rea­son to ex­pect vir­tual cur­rency to avoid a sim­i­lar fate.” His mes­sage should not be lost in the neg­a­tiv­ity of his in­to­na­tion. Cryp­tocur­ren­cies are here to stay. Nige­ria needs to de­velop the as­tute­ness to ef­fec­tively reg­u­late in­no­va­tion in­dus­tries.

4. Com­bat elec­tronic fraud

The trend in Nige­rian e-bank­ing is that the num­ber of fraud cases are ris­ing while the amount of money in­volved in the frauds are de­clin­ing. Ac­cord­ing to a re­cent CBN re­port, the num­ber of cases of fraud rose from 1,461 in­ci­dents in 2014 to 19,532 in 2016, which rep­re­sents 1,236 per­cent in­crease. How­ever, the amount in­volved in the frauds dropped by 43 per­cent, from N7.75 bil­lion in 2014 to N4.36 bil­lion in 2016. Dur­ing the same pe­riod, bank trans­ac­tions value rose from N43.85 tril­lion to N64.18 tril­lion.

This sug­gests Nige­ria is win­ning the fight against elec­tronic bank­ing fraud, while at the same time grow­ing bank trans­ac­tions at a very im­pres­sive pace. These suc­cesses may have prompted CBN Deputy Gover­nor, Op­er­a­tions Direc­torate, Bayo Ade­labu, to say the CBN tar­gets “zero” elec­tronic fraud in the bank­ing sec­tor. But such an overly op­ti­mistic tar­get might be a hint that the CBN over­sim­pli­fies the fraud prob­lem, and very likely, un­der­re­ports it.

Elec­tronic bank­ing fraud has been hardly elim­i­nated in any of the ad­vanced economies where adop­tion of e-bank­ing has moved through the growth stage to ma­tu­rity. More­over, the threat of cy­ber­at­tack is grow­ing around the world. Fi­nan­cial in­sti­tu­tions and their in­fra­struc­tures are of­ten the prime tar­gets of cy­ber­at­tacks.

It is also doubt­ful that the CBN re­port is com­pre­hen­sive. In ac­tual fact, it can­not be, not least be­cause in­ci­dents are of­ten un­der­re­ported by the banks and the fi­nan­cial tech­nol­ogy com­pa­nies. A rosy pic­ture is also good for the CBN. And we may ask whether fraud­u­lent ex­cess charges by the banks are also fac­tored in the fig­ures. Last Oc­to­ber, the CBN said it com­pelled the banks to re­fund N50 bil­lion ex­cess charges to their cus­tomers over the last three years. Ex­cess charges have be­come quite ram­pant with the mul­ti­ple bank charges, some of which are for e-bank­ing services.

Nev­er­the­less, the in­di­ca­tion of progress that has been made, as re­ported by the CBN, is im­por­tant and should be sus­tained. Us­ing the re­port as a ba­sis of fur­ther dis­cus­sion, the CBN and var­i­ous stake­hold­ers should try to curb the grow­ing num­ber of fraud in­ci­dents in 2018. If the num­ber of cases is grow­ing but the to­tal value in­volved is on a de­cline, it would mean the av­er­age value of a fraud case has de­clined. But if the cases con­tinue to mount, the like­li­hood of big amounts be­ing in­volved in some cases re­mains. If the risk crys­tal­izes, it would change the cur­rent pat­tern.

Be­sides, a grow­ing num­ber of cases of fraud will slow­down po­ten­tial adop­tion rate of bank­ing in gen­eral, and elec­tronic bank­ing in par­tic­u­lar. Both have im­pli­ca­tions for the for­mal­i­sa­tion of in­for­mal sec­tor busi­nesses and driv­ing the Nige­rian dig­i­tal econ­omy.

In 2018, the CBN should at least re­move the ban on cryp­tocur­rency. Ban­ning is sim­ply a crude reg­u­la­tory tool.

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