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26 THISDAY • WEDNESDAY, MAY 20, 2015 BUSINESSWORLD INTERVIEW Chukwu: Investors Are Not Yet Clear about Incoming Govt’s Policy Direction Managing Director/Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, told Obinna Chima that the volatility in the stock market may persist until the incoming government comes out with a clear economic policy that investors can relate with. Excerpts A lot of experts have been advising the incoming government to focus majorly on raising Nigeria’s non-oil revenue, whose component is also taxation. Don’t you think there would be a backlash from Nigerians if the tax rates are increased without a commensurate increase in their level of income? When you talk of non-oil revenue, there are several other areas beyond tax. We also have Customs duties, which also accounts for a large portion of the non-oil revenue. The Minister of Finance and the Coordinator of the Economy said recently that there are lots of leakages with duty waivers and if we focus more on that, we are going to have an increase in the level of revenue government gets from Customs. But by focusing on tax, what the government would be looking at, would not be to increase tax rates, but rather to increase the coverage. Today, 95 per cent of people who pay taxes in Nigeria are civil servants and those who work in established institutions. That is, those who pay under the Pay-As-You-Earn (PAYE) system. But the selfemployed people, a lot of them are significantly richer or earn more income than those in paid employment, but they hardly pay taxes. So, I think the emphasis should be on how to bring in, into the tax drag net, non-salaried workers who have reasonable level of income or even those who have low income. There is what is called minimum tax. So, everybody that is taxable should be subject to tax. I am sure that if you bring in the self-employed persons, you may find out that the tax revenue will more than double, that is on the PAYE. Then on the tax that is collected by the Federal Inland Revenue Service (FIRS), you are looking at company income tax and if you look at its level of enforcement, it is also very weak and so, we need to strengthen corporate governance standards. That is why I am happy with what the Financial Reporting Council (FRC) is trying to do. Companies should render their annual returns to the Corporate Affairs Commission (CAC) and based on that and the report they also tender to the FRC, they should be subject to tax. So, if all the registered companies in the country pay corporate tax, the federal government’s revenue would have significantly increased. So, the increase in non-oil revenue that is being emphasised now does not necessarily mean increasing the tax rate, but rather, expanding the tax drag net. But do you think it will be easy for the federal government to get the self-employed to pay tax? There is what is called self-assessment. Irrespective of whether a person is self-employed or not, every adult citizen should be made to complete a self-assessment form. The self-assessment form should indicate whether a person gets dividend income, allowance from a board sitting, and profit from an unincorporated businesses, etc. So by the time you complete the self-assessment form, every individual would have a taxable income. So, once you fill your tax returns, you should also make your tax payment. The draft document of the harmonised code of corporate governance that the FRC released recently has continued to generate a lot of debate. What in your opinion do you think is wrong with the idea to harmonise the various codes of corporate governance we have in the country? Well, I think what the FRC set out to achieve was to protect the interest of minority shareholders. That is the primary objective it wants to achieve. I also know that it would bring about a higher level of corporate governance standards and high level of transparency in corporate governance. But the hue and cry is because market operators feel that the unified draft corporate governance Chukwu standards would over regulate the economic space and businesses and might stifle creativity and industrial growth. They are also afraid that the objective of growing enterprises may also be defeated. You need to harmonise the objectives of the corporate entity with the objectives of the individuals. For instance, if you take the issue of board composition, you have one-third of board members being constituted by non-interest bearing shareholders, that is, shareholders who have no interest in the business, which is what you call independent shareholders. The independent shareholders’ lack of interest in the business may make them not to be as committed in driving the growth of the business. And when the key stakeholders bring up policies that would drive the growth of the company, he might be frustrated by the large number of independent shareholders who are only risk averse and have no personal interest in the prosperity and growth of that entity. So, I think having people who have no interest, whatsoever in a company dominating and having undue influence over the affairs of the company may not allow for economic growth. So are you suggesting that, that aspect of the proposed harmonise code should be reviewed? Yes, the unified corporate governance regulation they want to bring out should be reviewed. They need to look at several segments that market operators are complaining of such as the issue of the rotation of external auditors. The frequency of that rotation is also too regular and operators are saying that might not allow the external auditors to have a deep understanding of the operational activities of such companies as to carry out thorough audit. So, these are some of the reasons why operators are saying the FRC should allow that exposure draft to stay longer and set up meetings with interest groups so that they can synthesise these complaints and see how they can modify the guideline to achieve the primary objective of protecting minority interest without compromising economic growth. The stock market has been volatile this year, what do you think should be done to attract investors to the market? If you look at what has happened in the market this year, you have to situate it within the general political environment. So far, this year has been dominated by political activities. We saw a presidential election where there was heightened political tension about the future corporate existence of the country. So, it wasn’t a time for people to be very aggressive in terms of investments in any instrument, including stocks. Subsequently, we were lucky we had a president that conceded defeat and that stabilised the polity. But you now have policy uncertainty. Investors are not clear about what would be the policy direction of the incoming government and that is why the level bids in the market has been weak. You have seen the market move relatively southward over the last couple of days and I think that would persist until the inauguration of the new government and even after the inauguration, until they come out with a clear economic policy that investors can relate with. But don’t you think the retail investors should be encouraged to come back to the market? Well, a lot of factors have to be looked at. Firstly, you need to look at why the retail investors are no longer active in the market and the reason is that they lost a lot of money in 2008 and 2009 and a lot of them have not recovered from those losses. Secondly, there is no available credit to retail investors. So, any retail investor that wants to play in the market will play with his own equity and that equity is highly limited. The third factor is that we have seen long periods of contractionary monetary policy with the central bank driving up interest rate and making investments in fixed income instruments more attractive that investing in equities. A situation whereby you can put your money and earn 13 to 15 per cent on fixed income instruments will discourage you from playing in the equities market where you are not certain of the return. These factors have contributed to keeping away retail investors from the market. But having said that, I believe after the transition has taken place and we have a clear economic policy direction and government drives some level of financial stimulus to the economy, in form of quantitative easing or even increasing the liquidity available to the banks, so that interest rate would come down and they also need to relax the stringent conditions under which banks can lend for investment in equities. If these things are done, we should see the retail investors coming into the market. With the current situation in the economy, do you think the central bank would be willing to relax monetary policy? I always say that economic management issue is a balancing act. What I mean by balancing act is that you cannot achieve everything at the same time, something has to give in. So, if our priority today is to grow the economy, we need to lower interest rate and reduce the cash reserve ratio on public and private sector deposits, so that banks would have more liquidity. Given the depth of investable instruments, rates would come down and economic activities would pick up because companies and individuals need funding to engage in economic activities. But because the cost of funds is so high, a lot of people cannot borrow to engage in economic activities. We are aware that this would lead to some level of inflation, which was why I said managing an economy is a balancing act. So, we may need to accept that increased level of inflation as a cost of stimulating economic growth. If you look at a country like Brazil, at the height of their hyperinflation, the inflation rate was more than 1,000 per cent, but they were also growing the economy. Today, Brazil is one of the top economies in the world, but it had a heady growth and they had to accept inflation as the cost of that economic growth. The central bank and the commercial banks have set a deadline for those they termed chronic debtors to repay their debt. Do you think it was a good initiative by the bankers? Well, it is good that we have a way of enforcing collection and contracts. But whether the name and shame is the appropriate thing to do is what I don’t think. But I think what the central bank should is to work with the Ministry of Justice to strengthen the legal system. Foreclosure law should be in place, create commercial courts where these cases are judiciously treated. But I don’t think name and shame would be a lasting solution to addressing the issue of recalcitrant debtors. We need to go further than that. Those collaterals involved should be foreclosed. Even if you name and shame a person who had no shame in the first place and he still retains the funds he borrowed from the bank, what value have you created? So, we need to have ways of compelling people to pay their debts. What are your expectations from the new director general of the Securities and Exchange Commission? The good thing about SEC is that there is already a roadmap for the development of the Nigerian capital market and i expect him to implement it. He has operated from both sides of the coin. He had been a regulator and went back as an operator and came back as a regulator. So, it is easy for him to understand the dynamics of the market. So, we need to drive growth of the market, we need to deepen the market, we need to bring more classes of products into the market. We also need to have the key sectors of the economy listed in the market. Today, why the market does not reflect economic activities is because the sectors that drive the economy are not listed on the stock exchange. Take for instance, telecoms, it is about nine per cent of the GDP, but no telecoms company is listed on the stock exchange. Starcomms has already delisted. Also, look at the agricultural sector that has about 25 per cent of the GDP, apart from Okomu Oil and Presco that are listed. Look at the upstream oil and gas sector, apart from Seplat, there is no other upstream sector operator that is listed. So, the key thing is to encourage those sectors that account for a greater share of our economic activities to become listed. I think that should be some of the priority areas of focus for the new SEC director general.
THISDAY • WEDNESDAY, MAY 20, 2015 BUSINESSWORLD 27 ANALYSIS Nigerian Banks As Catalyst to Economic Growth Eromosele Abiodun writes that the GDP and economic growth achieved by Nigeria in the last decade would not have been possible without the firm support of deposit money banks The economies of all marketoriented nations depend on the efficient operation of complex and delicately balance systems of money and credit. Banks are an indispensable element in these systems. Commercial banks play an important role in economic development of developing countries. Economic development involves investment in various sectors of the economy. The banks collect savings from the people and mobilise savings for investment in industrial project. The investors borrow from banks to finance the projects. Also, commercial banks are involved in the process of increasing the wealth of the economy, particularly the capital goods needed for raising productivity. The developed economies need the service of the banking system to enable the economy attain economic growth, while the developing economies need the service of banking system for sectorial development. Financial institutions are therefore, capable of influencing the major saving propensities and opportunity. The need to achieve sustained economic growth within any economy can be possible admits strong financial institution and precisely within the existence of a virile banking system. Their activities must be such that are tailored to work in the congruence with government policies and programmes in a bid to attaining the desired macro-economic objectives as a nation. Generally commercial banks not only facilitate but speed up the process of economic development through making more funds available from resources mobilised. Through their function of financial intermediation, banks facilitate capital formation, lubricate the production engine turbines and promote economic growth. However, banks’ ability to engender economic growth and development depends on the health, soundness and stability of the banking system itself. The need for a strong, reliable and viable banking system is underscored by the fact that the industry is one of the few sectors in which the shareholders’ fund is only a small proportion of the liabilities of the enterprise. It is, therefore, not surprising that the banking industry is one of the most regulated sectors in any economy. Yet it has been argued in the public domain that the commercial banks have not been performing the desired roles in improving capital formation and promoting economic growth in the country. Capital formation refers to the net addition to the capital stock after of any nation after depreciation. It is defined as an addition to stock of capital assets set aside for future productive endeavours in real sector which will lead to more growth in physical capital assets of the country. Capital formation captures all the real-valueadded to the economy in real-asset-terms which will lead to further enhancement of savings, investment and generation of more wealth in future. Capital formation derives from savings accumulation. It has a positive impact on private savings accumulation in the sense that increase in capital formation will lead to more savings. When savings accumulate it will lead to an increase in gross domestic investment (GDI) and income generated as a result of the investment projects made will, in turn, lead to GDPgrowth. One of the most striking features of institutional credit in Nigeria in the last decade has been the significant increase in deposit money banks direct lending to the federal government (via the bond market) for building of infrastructural facilities, programme support and meeting budget deficits. Post consolidation, banks in the country has supported the Nigerian economy in no small measure. The result of their support is the reported economic and GDP growth of seven per cent over the last 10 years. As at today, Nigerian economy is the biggest in Africa and is predicted to hit $1trillion in 2030. Most Nigerian banks played a role in this First Bank’s Head Office Building success but the first tier banks played the bigger role given the size of their balance sheet. The clear leader in this regard is First Bank Nigeria Limited. Nation Building Model As West Africa’s pioneer financial services group, First Bank can be proud of its contributions to national growth and development over the past century, which places it at the vanguard of national policy evolution and thought leadership. The bank’s role in ensuring methodical and rapid economic transformation has been further strengthened through the First Bank Impact Series, the policy and thought leadership initiative of the bank. The series is run through insightful, actionable and change-centred conferences, workshops, seminars, strategy sessions, and policy implementation road-shows to drive far-reaching changes in the society. The initiative provides engaging platforms for evolving strategic outlook to problem-solving, especially from the capacity building and leadership perspectives. So far, the Bank has, through its concerted singular projects and collaborative partnerships, charted sustainable roadmaps in the spheres of leadership, youth development and socio-economic empowerment. Infrastructural Project Financing By playing key roles in the federal government’s privatisation and commercialisation scheme over the past years, First Bank has led the financing of private investment in infrastructure development in the Nigerian economy. A key element of the bank’s strategy is its continued focus on retail banking and consumer financing, gradually shifting towards a high yield diversified portfolio by aggressively targeting the middle class consumer market. The market opportunity is evident in the fact that consumer spending, which is a major driver of domestic demand in developed economies, still constitutes a relatively lower percentage of GDP in Nigeria. The Bank’s Transaction & Private Banking strategic business unit (SBU) ensures the banking convenience of high net-worth customers, who require specialised banking services to cater for their peculiar needs. Also, in order to provide enhanced support for smaller businesses, there has been a reorganisation of the Corporate Banking SBU to spin out the Commercial Banking SBU. This creates a different value proposition to that critical segment of the business community where pillars of economic growth are nurtured. First Bank’s Specialised Lending Department (SLD) focuses on structuring project and object finance transactions across various sectors of the economy, especially in the areas of infrastructure, power, oil and gas, transportation and real estate. The bank supports acquisition of stakes in Oil Mining Leases (OMLs), financing development of oilfields, financing cash calls for both operating and capital expenditures through Strategic Alliance Contracts. First Bank has provided over $1billion to part-finance acquisition of interests, as well as working capital for production to a number of OMLs; and an aggregate of about $500 million for construction and completion of Gas pipelines to marginal fields and cement plants. A review of the industry showed that First Bank is at the forefront in financing power projects and has provided over $220 million to part-finance the acquisition of both generating and distribution companies under the privatisation of the power sector by the federal government. The bank’s support for infrastructure development spans the entire country, having participated in various syndication transactions and direct funding of over N100 billion for redevelopment and tolling of roads, airport terminals, ultra-modern markets, site and services schemes, construction and maintenance of engineering infrastructure under PPP arrangements, New Town Developments, 24-hour lighting solutions and solar powered street lights, and Shopping Malls with Shoprite and Game as Anchor tenants. Funding Agriculture THISDAY findings revealed that First Bank is actively involved in the agricultural sector of the economy and has been a major financier of various types of assets for the establishment, expansion and modernisation of various agricultural enterprises. The bank has introduced customer-friendly and needfocused product schemes, partnered with international organisations and collaborated with Federal, State governments and the CBN, to support the sector. The bank told THISDAY that it will continue to support sectors with viable economic activities and infrastructure development projects, within the Bank’s defined target market and risk acceptance criteria. “Furthermore, the Bank will persist in generating insightful initiatives to impact citizen-oriented national development through the First Bank Impact Series and other development programmes,” the bank said. Corporate Governance A best-fit corporate governance promoter, First Bank’s corporate governance practice remains at the industry’s leading-edge. This is especially evident in its laudable leadership transition processes, ensuring that there is seamless business continuity and stability in all aspects of the Bank’s businesses. This corporate governance posture has won the Bank much respect and recognition both locally and internationally. The Bank’s prime status has been reinforced with the award of the prestigious ISO/IEC 27001:2005 certification, the world’s highest accreditation for information protection and security from the International Organisation for Standardisation (ISO). By this certification, First Bank distinguished itself as the first organisation in Nigeria to achieve the ISO 27001, which is an affirmation that the Bank has adopted and complied with the highest known standards in information security globally. After three years of certification, First Bank has successfully implemented the recertification of ISO/IEC 27001:2005 in 2013. In addition to this certification, First Bank again became the first organisation to be awarded the BS25999 certification, the highest accreditation in Business Continuity Management received from the British Standard Institute. The certifications confirm the Bank’s ability to safeguard its assets, staff well-being and customers’ investments, and favourably respond to incidents and business disruption to ensure business continuity at all times. The Bank has also achieved recertification in international Business Continuity Management CONT’D ON NEXT PAGE
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