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Impact Investing

Nigerian businesses want naira denominated funds to avoid exchange rate volatility-Chukwuma

INNOCENT CHUKWUMA is the Regional Director, West Africa, for the Ford Foundation. In this interview with TELIAT SULE (BusinessDay Research and Intelligence Unit-BRIU), he spoke about the impact investing landscape in Ghana and Nigeria, the challenges of impact investors and what the Nigerian government needed to do to improve the business environment: Excerpts.

Kindly give an overview of the landscape report on Nigeria and Ghana

As you heard us during the presentation, the report’s  primary purpose was to update the 2015 report that GIIN and Dalberg prepared, which provided information on investment inflows towards impact investing in Ghana and Nigeria. The opportunities within the sectors for growth and the challenges impact investors face in terms of investing more in the country and the sub-region. That report was and still the go-to report to some people on the knowledge of what is happening. It is a bit dated as it was produced in 2015 which means the research was conducted around 2014.

We thought we needed to update it because whoever is coming into the market should have up-to-date information on what is happening in the market, which was why Ford supported IIF to carry out the study, and also more importantly, why Dalberg who did the 2015 report was engaged to do it so that using the same template they used back then, they would be able to give us more information.

More so, if you look a bit more at the policy environment, how enabling or disabling is it to impact investors? And that is why we did it and going forward, the sector needs deeper dive on what is happening, because if you like, the report presents the global picture of the landscape in the sub-region. If you pick agriculture, education, affordable housing, the report gives you information on what is happening or what you need to know.

As you heard from the participants, the report has enabled us to know that more investors and investments are coming; DFIs are coming in; even the DFIs despite being the dominant players, their share of the market is beginning to reduce as more individual investors join. But there are some challenges that need to be overcome in terms of the enterprises that are business-ready and the insistence of enterprises to control their businesses by providing the necessary education and assistance required to get their enterprises ready for investment.

Even though the policy environment is in many ways a challenge, it is a challenge that investors are turning into opportunities by coming into Nigeria to invest. Yes, energy is a challenge, but it is something to include in your business decisions. That is not an issue for players who have the knowledge of the market from coming in, but it is also a call on the government to do more if they want more impact investors to come in.

To that extent, we are happy with that report and with the number of critical stakeholders that turned up to receive the report. But even more so, we want more dissemination so that the report will be the reference point for impact investing in the West African sub-region.

What are the similarities and differences between Ghana and Nigeria based on the findings in the report?

The similarities are the challenges impact investors have in finding enterprises to invest in, and these cut across the markets-Nigeria and Ghana. In terms of the dominant roles played by DFIs, is still the same. Where you will begin to have divergence is that the ease of doing business in Ghana is better than in Nigeria. They seem to have more proactive investors to deepen that market but while Nigeria is still getting investments in spite of the challenges is because investors are looking at the size of the market.

Yes, Ghana has a better investment environment, but in terms of the market, Nigeria has it more. But Nigeria should not continue to rely on that number-too big to fail mantra. This is because countries within the sub-region are actually beginning to think about how to do it without Nigeria. We saw recently how the francophone countries came together and decided they would use the Eco as a single currency. If they bond the market, the population that will be involved will be huge and maybe a critical challenge to Nigeria. The challenges are common, yet the divergence is that Ghana is doing better at improving its investment climate.

And that is why, if you look at investment, the amount of investment relative to population, we may say that Ghana is doing better. Nigeria is almost 200 million people while Ghana is about 29 million people. Ghana has about $1 billion in impact investment while Nigeria has $4 billion. If you use population ratio, you can see they are doing better than Nigeria. If you also look at the diversification of the market in terms of where the DFIs are investing-they are investing in ICT, energy, and others; growth sectors that will address the need of other sectors.

My major takeaway is that Nigeria should not be sleeping believing that investors will come. We are not the only populous country in the world. Smaller countries are finding ways to get around the number game by coming together to form a bigger market.

How much advocacy does Ford Foundation do to get the government to address some of the challenges faced by impact investors?

If you look at the annual convening that the IIF has done over the years were all targeted at bringing together key stakeholders in government and other areas. In 2018, the keynote speaker then, Okechukwu Enelamah, was the then Minister of Trade and Investment. The chair of that occasion was the Vice President of the Federal Republic of Nigeria, represented by the Chief Economic Adviser to the President, Adeyemi Dipeolu. We had three to four commissioners in Lagos State who attended the program.

More importantly about this report, we encouraged the researchers to do a deeper dive on the policy environment. With that, we will engage the government of what they need to do to improve the business environment. One of the projects that IIF will be doing this year with the support of the Ford Foundation is a round table on the need to create local impact fund, that is, a naira denominated impact fund. The challenge enterprises in Nigeria have with the DFIs is that the Nigerian businesses want naira denominated funds to avoid exchange rate volatility. They also want smaller tickets.

The informal sector dominates the business landscape in Nigeria because an average business is either a micro or a small or medium enterprise that may not absorb the kind of money an average DFI wants to invest in the country.  The average ticket size for a DFI is about $57.9 million. In Nigeria, any enterprise that absorbs that kind of money will be classified as a large corporation. We need more funds locally that can meet the needs of these SMEs in terms of smaller tickets, and more importantly, a naira denominated ticket which will not subject the local SMEs to the vagaries of the exchange rate volatility.

We are going to engage the government officials to see where we can raise funds-lower hanging impact funds, that can be lent to businesses at below-market rates so that their businesses can grow. When small businesses grow, they will pay more taxes, employ more people, the economy will grow.  So, we don’t have to be running to the debt market to solve everything. Private sector-led economy can bring in the needed capital to grow the economy.

Outlook for impact investing in Nigeria

It is promising and bright. The scale of the need is staggering. The quantum of the capital needed to address impact investing in Nigeria is so much that the public sector funding alone cannot address it. Development finance institutional funding alone cannot do it. Private foundations such as the Ford alone cannot do it. We need to create an enabling environment for traditional private capital where you have a lot of money to come into the middle where impact investing is, and achieve the financial returns and make the necessary impact on the business landscape.

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