BLOSSOMING THE NIGERIAN ECONOMY: REAL SECTOR FINANCING

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1 CBN s NATIONAL SEMINAR ON BANKS & THE NIGERIAN ECONOMY BLOSSOMING THE NIGERIAN ECONOMY: REAL SECTOR FINANCING JIM OVIA GROUP MD/CEO, ZENITH BANK PLC Sheraton Hotel & Towers, Abuja Tuesday February 12, 2008

2 Outline Introduction Nigerian Economy Current Situation The Real Sector Overview Real Sector: Financing Options Issues to Address Challenges Conclusion

3 Introduction Singapore Indonesia Malaysia The serious need to finance the real sector of the Nigerian economy has always featured prominently in the economic policies of various administrations even during the military era Shortly before 1999, banks credit portfolios were sectorally allocated: manufacturing, agric, mining construction and trading Many financing models for the real sector have been tried and tested: - SMEIS -10% of banks PBT Nigerian banks CEOs trip to Indonesia, Malaysia and Singapore in search of solution to SME financing (the miracle model) Indonesian model a nation of 240 million people and over 16,000 islands. Exceptional success in SME financing - Agricultural Guarantee Scheme - Development Banks

4 Nigerian Economy Current Situation What the World now Sees Economic Indicators Real GDP(US$bn) External Reserves (US$bn) Inflation Rate (%) External Debt (US$bn) FDI (Inflow) US$bn Exchange Rate Market Capitalization ($bn) Teledensity Strong growth across all metrics lead to Nigeria achieving an international rating of BB-

5 The Goldman Sachs Testimony Goldman Sachs on January 30, 2008 published a report on an improving African economy Nigeria fares better than most of the continent's average Nigeria s total public debt is now about $18.4bn ($15bn of this is domestic)

6 Rapid Capital Market Growth Goldman Sachs review of capital markets in Sub- Saharan Africa (excluding SA) shows Nigeria s indices higher than its peers by a wide margin. The NSE market capitalization has since grown from the $32bn position captured in the report to about $82bn as at year-end 2007 From all indications, Nigeria is on the path of rapid economic growth

7 Nigeria as the Engine of Growth in Africa Nigeria s current market capitalization (about $82bn) is over 50% of GDP which is an estimated $150bn for 2007

8 Nigeria Real Sector Overview Traditionally, real sector included: Agriculture Manufacturing Mining & quarrying Real estate/construction In today s new economy it could include: ICT Services The non-oil sector, of which the real sector is a component, now contributes more to national productivity than any other economic segment

9 The Re-emergence of the Non-oil Sector Growth in the oil sector has declined, from -1.74% in 1st half 2005 to -5.87% in 2nd half 2007 As the global economic crises continue; the fate of oil-dependent economies like Nigeria needs to be reassured The non-oil sector could help stimulate the economy

10 Service Sector Propelling the Economy Forward Since 2003 thanks to recent economic reforms the services sector has become the fastest growing non-oil segment. In contrast, the real sector component (agric & ind.) seem to be experiencing unsteady growth, from a cumulative 27.2% 1 st half 2003 to 13.38% by 1 st half 2007

11 ..But Some industries in real sector have gone into recession in recent years The once booming Textile Industry has laid off over 100,000 hands in last 5 years Most key players (Enpee, UNTL, etc) have closed their factories A major multinational (Michelin) closed shop early 2007, taking hundreds of jobs with it Real sector is characterized by small scale business entities, unable to compete effectively Less than 10% of operators control over 90% of existing market

12 Strengths The engine of economic growth: NIGERIAN ECONOMIC SECTORS % TO GDP ( 2006) Agriculture* 41.73% Oil & Gas 21.85% Distributive Trade 14.95% Telecomm/ Postal Services 1.83% Solid Minerals* 0.28% Manufacturing* 3.91% Finance and Insurance 3.9% Building/Construction* 1.62% Others 9.92% Employment generation Poverty alleviation FDI attraction Enhanced forex earnings More rapid economic advancement

13 Real Sector: Financing Options Development Finance Institutions Commercial Banks (SMIEIS, direct lending, etc) Micro Finance Institutions The Capital Market Private Equity

14 Development Finance Institutions Development Finance Yet to Have Major Impact on the Real Sector Past development finance initiatives include Nigerian Industrial development Bank (NIDB); Nigerian Bank for Commerce & Industry (MBCI); National Economic Reconstruction Fund (NERFUND), etc More recent initiatives In 2002, the 3 institutions above were merged to form the Bank of Industry (BOI). Other recent initiatives include the Nigerian Agricultural Cooperative & Rural Development Bank (NACRDB); Agricultural Credit Insurance Scheme (ACIS); Agricultural Credit Support Scheme (ACSS), etc These government initiatives only help to complement real sector financing in an economy that is now predominantly private-sector driven

15 SMEEIs Performance Report as at 31st December 2006 Commercial Banks SMIEIS: A) Real Sector / Enterprise NO. OF PROJECTS AMOUNT Agro - allied 29 1,091,021, Manufacturing 118 6,740,577, Construction 10 1,111,288, Solid Minerals 3 59,440, SUB TOTAL 160 9,002,327, B) Service-related Sector Information 21 1,749,763, Educational 4 166,935, Services 52 2,647,434, Tourism & Leisure 11 3,505,484, Others 0 0 SUB TOTAL 88 8,036,617, C) Micro Enterprises 0 0 GRAND TOTAL ,038,945,355.11

16 The Banking Sector is Now in Gear to Drive the Real Economy Forward Between 2005 & 2006, the 25 banks under SMIEIS pooled a total of N81.4bn for SME financing In 2006, real sector was the largest beneficiary, with 53% of total Direct Lending Banks credit to the real sector growing in tune with rapid growth in banking industry Microfinance Institutions: The recent emergence of MFIs (over 700) will ensure that the small scale real sector segment is served with needed funding

17 The Capital Market Option In recent times, firms in Nigeria have actively utilized the NSE to raise funds for business expansion In 2007, the NSE introduced a Third Tier Market, giving opportunity for small and medium enterprises to raise funds Some real sector operators are already taking advantage of the opportunity as some will be listed this quarter Capital market remains a convenient & affordable source of long term funding

18 Private Equity The power of private equity! Local & int l equity companies are ever in search of viable markets & businesses to invest in Total amount set aside by private equity companies in Nigeria in 2006 was N38.3bn The recent examples of banks, insurance and telecoms companies show the hunger of foreign & domestic equity companies

19 Infrastructure CHALLENGES This is the heart of the problem (power &transport) A disincentive to local & int l investors A major reason for high cost of funding & production Economic Unemployment rate is dropping, but still high Cost of living still remains high Purchasing power is low Demand/local consumption is low

20 Negotiating the Path Towards a Vibrant Real Sector Can Counter Many Issues Legal/regulatory issues Enforcing contractual agreements Sanctioning defaults Regulating real sector for enhanced productivity, quality & standards Corporate Governance Accountability & transparency Sustainability of corporate objectives Protecting investors and customers interests Respect for law & order

21 Hurdles to Growth Facing a Marathon and Not a Sprint External competition/smuggling strangling the local industry Government polices inconsistencies: VAT, duties, etc Entrepreneurial skills development over 30% of real sector businesses fail due to poor management Competition for limited funds (govt. resort to private sector funding for deficit financing & liquidity mgt.)

22 Conclusion Legal & regulatory framework to be in place, for enforcement of strict penalties against equity/loan abuses Reorientation on the gains of collaboration (local & int l) in meeting set business goals PPP partnership in tackling infrastructure and funding challenges in the real sector

23 THANK YOU in your best interest

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