Garuba: Banks Have Failed in Their Intermediation Role

Mohammed Garuba is a founding Partner/Director of CardinalStone Partners Limited, one of the leading investment banking firms in Nigeria. In this interview, Garuba says banks have left their traditional role of financial intermediation. He emphasises that

There is this argument that the events we have seen in the political space in the past few days does not have any effect on the market, while some have said it does. What is your take on that?

There are two ways to approach this. Initially, we all felt it didn’t have any effect and that was because, we were seeing more international investors who dunderstand investing in Africa. And so, on the back of that, what they’ve done was because they understand investing in Africa, they have been able to know that we have this political cycle and they are no longer interested in running away because if they sell at a loss within a short while, they would see everything come back very quickly. So, instead of us saying it is a political issue per say, their primary focus is that they want to understand the flow of foreign exchange (FX). FX to a large extent is a key determinant for them while political noise is a less important issue. Whether it is in Ghana, Kenya, and South Africa the cycles happen every four years in these jurisdictions, including North Africa. So, that is not the major focus. Their major focus is your FX. Just like we saw in 2015 elections, to a large extent, it was was one of the most volatile. But it didn’t affect our market as much as when we had FX problem that caused a recession, and everything went down. So, we have more economic crisis on the back of FX than on the back of politics. And that starts to show you the strong impact of FX. As our reserves started going down then, even the local economy, industries and banks were recording losses and it had more catastrophic impact. Right now, especially local banks are doing well. So, the political noise even for locals or even foreigners is not as much as FX. FX for us is key. If politics would have an impact on FX then everyone would start to run.

Whether it is the All Progressives Congress (APC) or the People’s Democratic Party (PDP) government, everybody is promising that they would improve infrastructure and when they say all these things, especially when you announce a huge budget, the concern is how to implement that budget because you would need a lot of FX, especially for your capital expenditure. So, the view right now is, will government be able to implement the budget. We have seen budget implementation of about 40 per cent, so we are estimating a 40 per cent implementation on the capital expenditure side. We have now looked at the FX component of that to see where the external reserves would be at the end of this year. So, the real watch for foreign investors is still not the political space, but how does this whole politics impact on FX.

So, what will you attribute the downturn in the stock market to?

The rhetorics by Donald Trump were largely of him trying to make America great again. People did not see that. But it is a key element in economics because while globalisation is the new world order, a man came and said ‘I want to close my economy,’ which is a complete change from what we understood. And so, what we have tried to see is that as he starts to do this, it is affecting every other economies. So, what do we then do as he is increasing interest rate, which is affecting Europe not just Africa. Monies flew from the US from the last financial crisis in 2008, to emerging markets. From a risk management point of view, US investors felt there was no need leaving all their monies in US. So, on their own, they started changing their strategy to invest part of these monies outside the US. And then trying to get of the recession, interest rate completely went down to zero per cent. So, if I would get zero per cent or negative returns, why leave my money in the US. So, a lot of monies naturally found their ways out of the US.

And so, a lot of monies it started flowing to emerging markets and then got to frontier markets such as Nigeria and that impacted the Nigerian economy massively.

So, presently, a lot of monies are flowing back to the US and there is empirical data to show all these. Now what is happening is that the whole of Europe, emerging and frontier markets are struggling to breathe.

So, it is not even about the elections. The Nigerian markets lost over seven per cent in May. Seven per cent is small, when you compare that to what is really happening across frontier markets. While it was seven per cent in Nigeria, in Venezuela, it was about nine per cent. The MSCI index which is a key indicator of frontier markets of various countries lost about 10 percent in May alone. Nigeria lost seven per cent and was the second best performing frontier market in the world, while Turkey lost about 17 per cent in one month. So, you find out that we are still doing well. Why only seven per cent? It was because we were still coming out from a recession. So, you see that the real impact is not just that Nigeria is losing, but everybody is losing.

Nigeria’s valuation has gone down, but so is it with every other frontier market. So, there is a positive correlation across other markets and there is a global world order. Stock markets are repricing everywhere. So, while we see a fairly strong half-year results, the stock market is not moving forward because as a country, have failed to develop stock market.

Between 1999 when we went back to democracy, if you compared the Nigerian stock market to that of South Africa 20 years ago, South Africa was about $500 billion in 1999, but today the market is about $1 trillion. The Nigerian stock market which was over $100 billion, today has reduced to over $40 billion. The Nigerian market has gone smaller in 20 years. That is because the regulators failed in their primary responsibility to develop the market. Every time foreign investors come into our market, we go up and when they exit, it goes down. That is not a market. A market is built around three core investors: retail which covers roughly 30 per cent of an average stock market; local institutional investors control 40 per cent. So, about 70 per cent is localised and the remaining 30 per cent goes to foreigners. When the Nigerian Stock Exchange (NSE) publishes data, sometimes you would see foreign investors controlling 50-70 per cent. With that, you do not have a market. We are now seeing regulators wake up. The new Pension Reform Act that has created a tiered system has started trying to solve that problem whereby local institutions must be made to invest in the market one way or the other because you create stability.

What can be done to deepen the stock market on the retail side especially in a country with a population of about 180 million people?

This was why I was drafted to join the Council of the Chartered Institute of Stockbrokers. When I left school, it was a pride to become a chartered stockbroker because it was still a developing career. That I think is the bane of the problem. The institute did not develop and we all started pursuing the stock market, we ignored risks and a few other things. So, I joined the Council and I am heading the Research and Technical Committee and these are some of the things we are handling. So, the career did not evolve and that is why you see courses like the Chartered Financial Analyst (CFA) coming to compete with us. Today, you have almost 78 per cent of the total chartered stockbrokers are above 50 years old. And less than 30 per cent are below 50 years. And out of that, only about 18 per cent are below 40 years. We are not grooming young people and the problem started almost 20 years ago. The Institute of Chartered Accountants of Nigeria (ICAN) for example, would have died, but they saw the Association of Chartered Certified Accountants (ACCA) moved from theory to objective and they started to change their syllabus to compete. But we left the CIS static and we were not dynamic and so not many people were subscribing because they didn’t see stockbroking as a viable career. So, you are straight jacketed and because of that, you have trained many stockbrokers to just know equities and you didn’t train them to learn research. Not until international firms started coming into Nigeria that we started seeing research improve. So, that is the bane of the problem and we only have about 2,000 qualified stockbrokers in the whole country.

So, the more stockbrokers you have, the more you can push awareness. The former Director General of the NSE, Dr. Ndi Okereke-Onyiuke tried in her own way to encourage NSE branches around Nigeria which have been shut down now. That wasn’t the best strategy, but at least something was happening. But that was done almost too late and at the peak of the market. And once the market started going down, everything crumbled. So, we have not been able to create enough awareness and we need to sit with the Securities and Exchange Commission (SEC) to come up with a proper strategy. So, when some of this noise were made, SEC came up with a 10-year masterplan and even the implementation is way behind with so many extraneous forces. They have written a lot of things and for two years, there is even no board to approve some of those initiatives.

So, there are too any issues in the capital market. A lot of the initiatives are already in the works, but we are behind again. By now, we were supposed to have started introducing investing in primary education in collaboration with the Ministry of Education because it is what people know that they would do. We are also pushing entrepreneurship. When I graduated about 20 years ago, we were only trained to carry our CV to look for an uncle for a job and you don’t even think you can start a business. The more businesses we start the potential for companies to come and list on the stock exchange. In ten years, we have had only two initial public offers