Posted by Chamberlain Peterside, Ph.D on
The wind of change sweeping the banking sector since last July (when capital requirement was hiked by the Central Bank) has now reached the insurance industry. According to recent Ministry of Finance pronouncement, minimum capitalization for insurance companies will increase from 150 - 200 million Naira for life and general insurance carriers to 2 - 5 billion respectively by mid 2007.
…Deja vu
The wind of change sweeping the banking sector since last July (when capital requirement was hiked by the Central Bank) has now reached the insurance industry. According to recent Ministry of Finance pronouncement, minimum capitalization for insurance companies will increase from 150 - 200 million Naira for life and general insurance carriers to 2 - 5 billion respectively by mid 2007.
As usual, most insurance executives are reacting to this news with trepidation. By their reckoning such draconian measures usually exact undue stress on operations because of the emergent need to raise huge amount of equity within a relatively short while. You can't help but feel for them, but a market rule recognizes no sentiments. If you ask me, I'd say, Nigeria is ripe for a qualitative leap in the level of activities within the productive and service sector. It would require sweeping measures rather than short-gun approach to achieve that.
An analysis of Nigeria would reveal to you the rationale for far-reaching financial reform. As the country stands at a crossroad in today's global market, all its major indices leave much to be desired. Nigeria's financial institutions are non-starters in the international arena. In the face of seeming banking boom and fast-paced growth of the financial industry during the last 15 years, Nigeria still ranks as one of the poorest nations on earth, with dismal life quality, unconscionably high unemployment rate and widespread abject poverty. According to recent World Bank report, Nigeria has one of the harshest business climates, which explains the poor state of infrastructure and Small & Medium Enterprises (SME). Without a robust and competitive banking/insurance industry, it is practically impossible to escape from this vicious circle or maximize the country's potential.
…Comparative Assessment.
To put Nigeria's financial system in context consider these key facts.
With a population of over 135 million people, Nigeria has one of the lowest ratios of bank branches to population leading to meager domestic savings-mobilization. The economy remains very cash-based and large liquidity in the informal sector is concentrated outside the banking sector.
According to statistics, the largest bank in Nigeria has an asset and capital base lower than the smallest bank in South Africa, resulting in the dearth of long-term financing.
At less than $10 billion, with nearly 300 quoted securities, total capitalization of Nigeria's stock market is less than a single large-cap equity in the New York Stock Exchange (NYSE). Corporate debt issue in Nigeria is still an anomaly, as institutional investors remain a rear breed in the capital market.
The gross domestic product (GDP) of Nigeria is less than the turnover of any major US corporation such as Microsoft and the likes, which translates into a per capita GDP of less than $400.
Statistics show that the total asset of Nigeria's banking industry is less than the annual remittance from Africans in the Diaspora estimated at over $12 billion.
Nigerian banks are not considered financially sound enough even by the federal government, so much so that its foreign reserves and export proceeds are domiciled abroad and transferred piecemeal to fund domestic forex demand.
All these point to the need for radical reform in the financial market. For ones, policy markers at the helm, nay Soludo and Ngozi Okonjo-Iweala (the Central Bank Governor and Minister of Finance respectively) realize it and are willing to take fearless, albeit bitter measures to start rectifying the anomaly. The experience of advanced countries or even the emerging markets is instructive in that respect. Over the same 10 to 15 years, the financial markets of South Korea, India, Russia, Malaysia, Brazil etc have assumed commanding heights in funding productive sector and infrastructure development.
…More Money, Few Deals.
Already, the current spate of consolidation in Nigeria's banking sector have instigated a frenzied pace of activity in the capital market, merger talks are in full swing amongst most banks and a new competitive spirit is in the air. Anecdotal evidence suggests that the banks are now actively pursuing deals amongst erstwhile neglected entrepreneurs. All this bodes well for the economy in general. Similar activities are in the offing for the insurance companies and hopefully the mortgage industry. Already there is talk about a new wave of equity listings by insurance companies come January 2006.
Critics of this policy argue that mergers and consolidation cannot be nurtured by administrative fiat or that high capital structure would create serious problems of resource-allocation for banks and insurance companies. The first assertion seem logical, based on industry experience world wide, - but left alone, would Nigerian senior bankers ever consider merging? Secondly, the problem inefficient asset-deployment in Nigeria is partly a function of banks unwillingness or inability to source quality deals or fund long-term projects and productive sector. In a post-consolidation era Nigerian banks will be saddled with the problem of prudently utilizing the huge assets raised to deliver impressive returns. In other words, the time is coming when bankers and entrepreneurs must brace up for 'more money chasing fewer deals".
…The Insurance Experience.
Historically, domestic insurance companies have lacked the wherewithal to underwrite sizable deals, Except for NICON Insurance (that enjoyed unfettered access to government's insurance business), and handful of old/new generation insurance companies, others simply operated on the fringes of the risk-management industry. In fact, African-Reinsurance Corporation remains the only insurance company operating in Nigeria that is internationally rated by AM Best Rating Agency (BB+).
Due to poor risk management capability and dismal credit rating insurance carriers in Nigeria have continued to loose substantial underwriting deals (even for assets based within the country) to foreign competitors. Major insurance coverage in Nigeria's burgeoning oil industry remains almost an exclusive preserve of foreign carriers to the chagrin of local counterparts. The cabotage and pension reform laws are bound to open a new vista for domestic insurance companies, how well-positioned the institutions are to take advantage of these opportunities is a different story.
Experts concur that more capital per se won't solve all the problems plaguing the industry. Beyond simply raising their capital base, financial institutions, whether banks or insurance companies must be far-sighted to identify emerging opportunities in Nigeria's economic terrain. There is an endemic problem of operational sluggishness, managerial incompetence, perennial complacency and low customer service standard that confronts the industry today.
Increased capital base might not fix all that, but at least it could translate into stronger ability to tackle this malady and help support national development effort, as well as implement technological innovations in their operations.
With time, smart financial institutions in Nigeria will increasingly be able to harness new opportunities not just locally but regionally and maybe globally.