The emergence of a Nigerian Pan-African Bank

The President and Chairman of Council of Chartered Institute of Bankers of Nigeria (CIBN), Council Members, Chairman of this Occasion, Special Guests, members of the Press and Distinguished Colleagues.

I welcome you with great pleasure to the 4th Valedictory Lecture organized by the CIBN. I feel honored to give this valedictory lecture, as the out-going Group Managing Director/Chief Executive Officer of United Bank for Africa (UBA) Plc, a foremost Nigerian Pan-African Bank. I also feel privileged to have served the banking industry in a career that spanned more than   three decades, especially the last six years, when the mantle of leadership of our great institution fell upon my shoulders.

My foray into banking was accidental, given my Engineering background though backed by an MBA (Finance). I commenced my banking career in 1988 at International Merchant Bank. I then went to work for Citibank between 1988 and 1991, where I got extensive training in Banking Operations, Relationship Management, Credit/Marketing and Risk Management.

An opportunity to be part of an elite team to pioneer a commercial bank arose when I joined Diamond Bank in 1991 as a pioneer staff, and rose through the ranks to the position of Executive Director in 1999 until 2004, when I retired as Executive Director, Commercial/Retail Banking. I had a brief stint with Reliance Bank as Deputy Managing Director in 2004, before joining Standard Trust Bank as an Executive Director in December of that year.

The CIBN request for me to give a Valedictory Lecture has stirred within me, deep and emotional   memories of my 3-decade career experience in banking. It has given a chance to look back and marvel at how much the banking sector has changed over this time. And in  scanning  through my  memorable journey in the Nigerian banking industry, I will like to use this opportunity to share  a unique part of this journey, that I have been  fortunate to have personally experienced, supervised and witness    grow.

I joined UBA just in time in December 2004 to be part of the team that engineered the historic merger in  2005  between United Bank for Africa (UBA) Plc and the then Standard Trust Bank (STB) to create a bank with an  asset size in excess of one  trillion Naira.

Prior to the merger, STB had commenced its foray into the African continent with the establishment of a Ghana subsidiary in 2004 before spreading to other countries. The African expansion gained momentum after the consolidation in 2005. I was deeply involved with this Pan-African ambition of the Bank and I relish the experience, both at professional and at a personal level, hence the choice of my topic today “The Emergence of a Nigerian Pan-African Bank”.

Why Africa?

The seed for a Pan-African Bank was sown in 2004 with the opening of our first subsidiary outside Nigeria, STB Ghana. However, the order by the Central Bank of Nigeria (CBN) in 2004 that all banks boost their minimum capital to N25 billion   and the resulting UBA/STB merger in 2005 fuelled our passion for further African expansion.

We subsequently worked with McKinsey, a leading global consulting firm, to craft a new strategic direction for the Bank, given the changed banking environment. Africa featured prominently in our new vision and mission statements. This informed the adoption of the legacy name, United Bank for Africa Plc by the Board of Directors at the time of the UBA/STB merger, underscoring the importance of the African continent to the Bank’s future.

In retrospect, I would say that our African expansion was a very bold move as foreign investor sentiments of the continent was   very negative because of decades of weak economic growth, poverty and instability; hence it was labeled “The Dark Continent” by The Economist magazine at the start of the century.

Today, Africa has taken a turn for the better. Since, the middle of last decade, Sub-Saharan Africa GDP has averaged 6.1% until the financial crisis of 2008. Post 2008, the region has continued to grow with Sub-Saharan Africa GDP growth rate of 3.5%, higher than the global GDP and advanced economies GDP of 3.1% and 1.9% respectively by 2015.

Growth on the continent has been driven by the exploitation of its massive and rich natural resources. Africa accounts for about 10% of the world’s crude oil, 8% of global gas, 42% of gold and 73% of platinum reserves. Sub Saharan Africa thus benefitted immensely from rising commodity prices in the last decade,  which boosted government revenues and Foreign Direct Investments, resulting in a significant growth in disposable income as seen in the 71% spike in Sub-Saharan Africa’s GDP per capita from $897 in 2005 to $1,530 in 2010.

Against this backdrop, the region became one of the world’s fastest growing markets, leading to The Economist magazine reversing its position on the continent’s outlook from the “The Dark Continent” to “Africa Rising”!

I am happy to say that UBA has played a critical role in changing the narrative of  the African continent  by being   part of the  catalyst for this economic transformation through the provision of world class financial services to Africa’s  key growth sectors and economies.

Our Entry Strategy

Our African expansion programme was based on a comprehensive review of the socio-economic outlook of the region. We ensured our geographic spread strategically cut across various markets and economic blocs in order to effectively achieve our goal of rendering financial services and tap into opportunities across the continent. Thus our subsidiaries are strategically located in these economic/regional blocs;

·ECOWAS (Economic Community of West African States),

·CEMAC (Central African Economy and Monetary Community),

·EAC (East African Community) and

·SADC (South African Development Community).

We   deployed a mix of new licenses and acquisitions in setting up subsidiaries. Of the current 18 banking subsidiaries, 16 were greenfield investments while the other two, Benin and Burkina Faso were brownfield investments.

In our experience, each of the two entry approaches comes with its advantages and disadvantages. For greenfield expansion, the advantages are:

  Higher corporate governance and compliance standards given we own the subsidiaries from the very start

   Control over our staff recruitment and able to build our brand without the burden of legacy branding issues

    Greater control of all aspects of the business

    Undiluted culture

    Asset quality

However, this approach also has its disadvantages including:

The learning curve involved in understanding government regulations especially in the initial set-up phase

    Slow build-up of franchise

For the brownfield approach, key advantages from our experience include:

Assured market share at acquisition since the bank was previously in existence

    License already secured with clearly defined scope

Much deeper knowledge of the country from the start

Whilst some identified disadvantages include:

Dealing with legacy issues especially asset quality

Challenges with blending different cultures

Dealing with stakeholders that have different interests e.g. unions

You may not fully know what you are buying!

Opportunities

We moved into Africa because we saw increasing opportunities due to the improving political climate, steady growth in GDP, growing workforce and rapidly increasing disposable income.   We also realised that the   presence of Pan-African financial institutions will help drive financial inclusion across the continent and foster integration via intra-African trade.

Specifically, our African expansion has helped us tap into the following opportunities on the continent;

Diversified Banking Model

Africa has provided ample opportunity for UBA to diversify its banking business and therefore ensure sustainable revenues regardless of economic cycle. As a Pan-African bank, we generate earnings from various regions so that we are not overtly exposed to a particular part of the continent and hence protected from systemic risks. Some African countries by default have a larger percentage of their revenues generated from commodities. The economies of these countries mirror the trend of global commodity prices. The systemic risk which this portends could be easily avoided by conducting businesses across countries with different economic drivers.

One of the critical considerations in our expansion into the continent was the need to ensure that we are not overly exposed to markets with similar commodity drivers. This was an important consideration in our choice of African countries to deploy our resources in order to ensure that the Bank was protected from systemic risks from other countries. This enabled us to achieve a relatively diversified portfolio within the Group.

Our medium term strategic objective is to effectively diversify our revenue streams to achieve a balanced (50:50) earnings between Nigerian operations and African subsidiaries. Currently, the distribution between Nigeria and African operations is 72:28.

Larger Customer Base

UBA has an estimated potential customer size of 587 million from our 19 countries of operations within the continent. Currently, the customer base is over 10 million, one of the highest within the continent, achieved largely due to our wide geographic spread.

This larger customer base has also presented a platform for deepening relationships with existing clients. Globalization has resulted in manufacturing and service-oriented firms seeking new markets and cheaper labour in their expansion plans across Africa in their pursuit to grow revenues via new markets. Given our presence and better understanding of how the market functions, we are well positioned to offer services ranging from advisory, trade finance, cash management, payment products and others based on the needs of our numerous customers.

Exploiting Trade Opportunities

African countries have started exploring options of increasing trade amongst themselves at the bilateral and regional levels. Historically, intra-African trade has been hampered by lack of required infrastructure, which is receiving strong attention recently from most African governments. However, the adoption of policies to promote investments in sectors outside commodities in order to diversify their economies will further drive intra-African trade. Key examples of these polices could include tax holidays, waivers, market interventions etc

The volume of formal intra-African trade is relatively low and estimated between 10% and 12% of Africa’s total trade. Comparable figures are 40% in North America and about 60% in Western Europe[1]. This implies existence of a huge opportunity for intra-African trade to grow and for a Pan-African Bank to leverage this growth to achieve a significant increase in its earnings. UBA has successfully harnessed this opportunity by the use of its trade platform called Afritrade targeted at trade businesses within the continent.

Another important sub-sector of the intra-African trade is the huge informal trade that occurs across African borders. AfDB report estimates the informal sector contributes about 55% of Sub-Saharan Africa’s GDP and 80% of the labour force. Recently, the National Bureau of Statistics in Nigeria released a report that put informal economy at 41%, with a value of N39trillion. Informal trade is a significant part of this informal market and provides a huge opportunity for a Pan-African bank like UBA to formalize such informal trade through provision of quality financial services. We leveraged on this opportunity through the capture of the remittance flows with our Africash product and Afritrade for trade transactions backed by necessary documentation.

Concerning the potential of informal trade on the continent, I strongly feel African Central Banks have a greater role to play by collaborating to promote the development of cross border trade platforms in order to encourage the informal sector to join the formal banking system. When this is done, the opportunity will be readily captured by Pan-African banks.

Intra-African trade growth will be further supported by the introduction of a visa-free travel policy across the continent by the African Union as well as the development of intra-regional transport infrastructure.

Deepening Financial Inclusion and Retail Banking

Pan-African banks would also benefit significantly from increased financial inclusion on the continent. Globally, Sub-Saharan Africa remains the region with the lowest level financial inclusion. It is estimated that only 34% of adults in Africa have an account in 2014, up from 24% in 2011. I anticipate these figures to improve as the African economy continues to expand.  The ability of financial institutions to tailor products and services to meet the needs of those financially excluded will further deepen financial inclusion across the continent. Financial inclusion is necessary to ensure economic growth performance is inclusive and sustained.

We have seen the use of mobile money account in deepening financial inclusion. Data shows about 12% of the population in Sub-saharan Africa has a mobile money account as against 2% of adults worldwide. This signifies the extent that the use of innovative products could go in improving financial inclusion. I believe mobile technology has the potential to vastly expand financial inclusion across Africa.  Pan-African banks with a good understanding of the continent can leverage their technology platform to capture this opportunity. Invariably this will mean a growth in retail banking as most of those financially excluded fall within this bracket.

UBA has effectively been promoting financial inclusion on continent by leveraging on our advanced digital banking platform. Working with our payment partners, we are improving the payment systems on the continent with prepaid and debit payment cards as well as our mobile and internet banking platforms, which have been deployed and adapted for our subsidiaries across Africa.

Efficient LC Processing

The huge informal trade as well as the growing intra-African trade I spoke about, are opportunities that financial institutions operating within the continent can capture via the use of existing trade products such as Letters of Confirmation (LCs). The current practice for an LC confirmation is for it to be done outside Africa by European and US banks even if the companies consummating the trade both reside within the continent. This need not be so.

It is my strong belief that businesses conducted across African borders can be efficiently financed by eliminating the extra cost incurred when LCs are confirmed outside the shores of the continent. There will also be efficiency gains in the reduced time to confirm and negotiate LCs for customers coming from two African countries. As a Pan-African, UBA has provided and will continue to provide this unique service and support to its customers across the continent.

Economies of Scale

A Pan-African banking model creates room for innovativeness and ability to benefit from economies of scale in order to be more cost efficient. The ability to group related banking functions together and provide service from a single platform could lead to huge cost savings.

UBA leveraged this concept by setting up a Group Shared Services platform. The Group Shared Services platform has been used to handle some routine tasks carried out at our business offices and subsidiaries, thereby cutting costs, ensuring standardization and improving efficiency across the entire Group. We established two platforms to handle some transactions relating to either Anglophone or Francophone.

 Phillips Oduoza