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Nigeria: Financial Services Cluster Analysis and Recommendations

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Nigeria: Financial Services Cluster Analysis and Recommendations NIGERIA Financial Services Cluster Analysis and Recommendations Lars Becker Matthias Boyer Chammard Zeinab W Hussein Yosuke Kotsuji Nana Quagraine Submitted for: Professor Michael E. Porter The Microeconomics of Competitiveness: Firms, Clusters & Economic Development May 2nd, 2008 Table of Content 1. EXECUTIVE SUMMARY........................................................................................................... 1 2. POLITICAL, SOCIAL AND LEGAL CONTEXT ........................................................................ 1 3. ECONOMIC PERFORMANCE............................................................................................... 3 4. ASSESSMENT OF THE BUSINESS ENVIRONMENT IN NIGERIA.............................................. 6 5. STRATEGIC ISSUES FOR NIGERIA........................................................................................ 10 6. RECOMMENDATIONS FOR THE COUNTRY ....................................................................... 11 7. ANALYSIS OF NIGERIAN FINANCIAL SERVICES CLUSTER ................................................ 13 8. THE DIAMOND OF THE NIGERIAN FINANCIAL SERVICES CLUSTER ................................ 24 9. SUMMARY OF STRATEGIC ISSUES FOR FINANCIAL SERVICES CLUSTER......................... 27 10. RECOMMENDATIONS FOR FINANCIAL SERVICES CLUSTER ......................................... 27 MAP OF NIGERIA 1. Executive Summary Nigeria has the second largest financial services sector in Sub-Saharan Africa, after South Africa. It is fast growing and at the cusp of expanding internationally. According to our analysis, Nigeria is well on its way to establish itself as a regional financial services centre, and has the opportunity to become an influential player for providing financial services in low income countries. The domestic macroeconomic background is favorable. Nigeria has the largest population in Africa, and is among its fastest growing economies mainly due to growth in the oil sector. The non-oil sector, although still underdeveloped, has also had strong growth, with a CAGR of 7% over the past 10 years. However, at the microeconomic level the country has a challenging business environment. It has high poverty rates, limited access to finance, poor physical infrastructure and high corruption levels. These barriers to economic growth have to be addressed quickly to ensure future growth. The government needs to make Nigeria a more attractive place to invest and it needs to diversify the economy by accelerating development of the non-oil sector. The financial services cluster has benefited from recent reforms and from increasing FDI into Nigerian financial institutions. Nigerian banks’ assets and deposits are rising at about 30% pa; and these locally owned banks are expanding internationally. Based on our analysis the sector needs to improve risk management and increase the skill base of its employees to maintain its current growth level. The government also needs to facilitate the expansion of the banking footprint beyond the middle class, and into other countries. 2. Political, Social and Legal Context Geography & demography: Nigeria is located on the Atlantic coast of West Africa, bordering Niger, Benin, Chad and Cameroon. It is Africa’s most populous country with an estimated population of 144 1 Million people1. Nigeria is composed of more than 250 ethnic groups; with the Hausa and Fulani (29%), Yoruba (21%), Igbo (18%) and Ijaw (10%) being the most populous and politically influential. 50% of Nigerians are Muslims, 40% Christians and the balance 10% have indigenous religious affiliations. English is the official language, while most neighboring countries are French speaking. Political context: Nigeria gained its independence from the British in 1960. After a series of 16 military governments, a new constitutional dispensation came into effect in 1999 followed by the election of a civilian president, Olesugun Obasanjo. Nigeria has been ruled by civilian administrations for only nine of its 36 years of independence. The last election in 2007 which installed Mr. Yar’dua, as president was marred by irregularities and the fairness of the election was questioned. The elections which marked the rise to power of the first university educated president in the past 40 years also witnessed the first civilian-to-civilian transfer of power in Nigeria’s history. Nigeria now faces the challenge of uniting the diverse ethnic groupings and diffusing long standing ethnic and religious tensions. Politics remain highly confrontational with clashes over policy directions and priorities. The new constitution is also a source of political tension. Critics claim that it concentrates too much power on the central government. Social context: Compared to its neighbors, Nigeria has lower human and social development indicators. 70% of the population lives below $1 a day and 92% of the population lives below $2 per day (see Figure 1). The UNDP ranks Nigeria as a low human development country at 158 out of 177. Despite its oil wealth, Nigeria remains a highly unequal society with a gini coefficient of 0.43. The government introduced universal basic education (UBE) in 1999; however education standards continue to fall with the combined enrollment ratio at only 56% and a literacy rate of 69%. Government spending on education as a percentage of GDP is 3% which is well below the level of spending in South Africa (5.4%), Ghana (5.4%) and Kenya (6.7%). Health remains a challenge, despite 1 EIU Country Profile-2007 Nigeria, CIA Fact book, Nigeria, https://www.cia.gov/library/publications/the-world- factbook/geos/ni.html and 2008 Euromonitor International accessed through KSG Library 2 the low prevalence rate of HIV at 3.9%, 2 other health indicators remain challenging. Public expenditure on health is only 1.4% of GDP. Violent and organized crime have become synonymous with Nigeria in recent times, with incidences of money laundering, internet fraud, credit card and identity fraud. In 2003 the government installed a special committee to address the rising internet fraud which causes difficulties for business especially in the financial sector. FIGURE 1: SOCIAL AND HUMAN DEVELOPMENT INDICATORS Social Indicators Nigeria South Africa Kenya Ghana Cote d'Ivoire Benin Total Population 144.70 47.30 35.10 22.50 18.50 8.69 Population Growth Rate-2005-2015 2.20 0.50 2.60 1.90 1.80 2.90 Urban Population 2005(%) 48.20 59.30 20.70 47.80 45.00 40.10 Total Population Above 65 and Below 15 years 2005(%) 47.20 36.30 45.30 42.60 44.90 46.90 HDI Value (UNDP 2007)1 0.470 0.674 0.521 0.553 0.432 0.437 Gini Index3 43.70 57.80 42.50 40.80 50.80 36.50 HDI Rank (UNDP 2007)2 out of 177 158.00 121.00 148.00 135.00 166.00 163.00 Life Expectancy at Birth(Years) 46.50 50.80 52.10 59.10 47.40 55.40 Adult Literacy Rate % of population 15 years or older 69.10 82.40 73.60 57.90 48.70 34.70 Combined Primary, Secondary and Tertiary Enrollment Ratio % 56.20 77.00 60.60 50.70 39.60 50.70 HIV Prevalence % 3.90 18.80 6.10 2.30 7.10 1.80 Population below $1/day % 70.80 10.70 22.80 44.80 14.80 30.90 Population below $2/day % 92.40 34.10 58.30 78.50 48.50 73.70 Expenditure on Education % of GDP 3.00 5.40 6.70 5.40 4.60 3.50 GDP Per Capita, PPP US$ 1,128 11,110 1,240 2,480 1,648 1,141 SOURCE: EIU COUNTRY PROFILE, 2007, NIGERIA WWW.EIU.ORG AND UNDP HUMAN DEVELOPMENT REPORT, 2007-2008 Legal context: Under the current civilian regime, there are attempts to strengthen the judiciary by giving it powers and independence. However, the legal environment remains challenging. The judicial system is still deeply undermined by corruption and hugely under-funded. This has resulted in poor administration of justice, including long delays in the hearing of cases. 3. Economic Performance Nigeria is Sub-Saharan Africa’s second biggest economy, with nominal 2006 GDP of $235bn (at PPP)3 behind South Africa’s $600bn. It has also been one of its fastest growing economies, outpacing South Africa, Kenya, Ghana and most of its neighbors with a CAGR of 7% over the past 10 years. However, its growth has been more erratic due to the high reliance on natural resources (see further 2 Source:www.hdr.undp.org, UNDP, Human Developemt Report 2007, Data for the recent year measured is 2005 and 2004 and EIU Country Profile, May 2007, Country Report, Nigeria. 3 US $115bn was the actual GDP for 2006. http://devdata.worldbank.org/ 3 below). EIU expects real GDP growth to continue at a strong rate of 7.4% in 2008 and 6.5% in 2009. This buoyant economic climate is fueling growth also in the financial sector. FIGURE 2 – ECONOMIC GROWTH VS.NEIGHBORS 12 10 Nigeria 8 6 Ghana 4 Cote 2 d'Ivoire 0 Cameroon -2 1997 1999 2001 2003 2005 Benin -4 -6 SOURCE: WDI Despite the fast pace of growth and the strong resource endowment, Nigeria has so far not increased its GDP/capita beyond that of its smaller and resource-poor neighbors. It’s GDP/capita is below that of Cameroon, Ivory Coast, Kenya, and it is only 12% that of South Africa4. Poverty and the rural nature of Nigeria puts pressure on financial services institution to innovate and to reach out to poor customers. FIGURE 3 – COMPOSITION OF ECONOMY VS.NEIGHBORS FIGURE 4 – GROWTH OF SECTORS 100% 30 Services 25 80% 20 Agriculture 60% 15 Manufacturing 10 N. Resources/ 40% 5 Industry Manufacturing 0 20% N Resources -5 1997 1999 2001 2003 2005 2007 Services 0% /Industry -10 -15 Agriculture -20 SOURCE: EIU Composition of Economy: Nigeria’s economy is heavily reliant on the oil and gas sector. It makes up more than 40% of the GDP (see “Natural Resources/Industry” in Figure 3), and accounts for virtually 100% of exports5 and 80% of budgetary revenues for the government. Nigeria is the world’s 12th largest producer of oil, mainly supplying the US. Next to natural resources the most important sector is agriculture, accounting for approximately 35% of GDP. A large portion of this is subsistence farming 4 At constant 2000 US$, Nigeria: $439, Ivory Coast $576, Cameroon: $750, Kenya $455, South Africa: $3,562.
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