The Nigerian central bank’s directive that the country’s lenders must have a minimum 65% loan-to-deposit ratio by March will be credit negative as the banks are pushed towards making riskier loans, Moody’s said on 13 January. Loans will need to grow by about 5% from the end of October to meet the new rules, Moody’s says.
Pension funds cannot place money with banks rated below investment grade, meaning that pension assets are concentrated in 10 or 11 banks, says Wale Okunrinboye, an investment analyst at Sigma Pensions in Lagos. Neither can the pension funds invest in banks that do not pay dividends, while investing in foreign assets requires an “almost presidential level of approval”.
With a working age population estimated at over 100 million, the number of Nigerians in pension schemes is just 8.79 million, according to the second-quarter report published by Nigeria’s National Pension Commission in August. But according to the OECD, only the Dominican Republic, Egypt and India have similarly restrictive rules on foreign investment by pension schemes. Direct investment in real estate by Nigerian pension funds is also not allowed.
The result of these restrictions is to “shrink the investment universe” even as the pension industry expands, Okunrinboye says. The pension commission report shows that about 70% of pension fund assets were invested in government securities. The value of investments in domestic equities fell 9% quarter-on-quarter as stock market prices dropped.
Cautious banking mindset
Ifeanyi Onyenwe Nwanna and Kelechukwu Stanley Ogbonna at Nigeria’s Nnamdi Azikiwe University have argued that the country’s pension schemes are “highly deficient” and that better pension management can contribute to economic growth by providing a pool of savings for long-term investment.
Banks have failed to fulfil that role.
- “Nigerian banks over the last few years have left their primary role of financial intermediation and focused on just investing deposits in government securities rather than bridging deficits in the economy,” says Oluwasegun Akinwale, an investment analyst in Lagos.
- The fixed-income bolthole has become less attractive as government bond yields have declined. “The broad-based depression in fixed income yields will further expose the impact of the lower margins on new loans,” Akinwale says.
There is little prospect of the banking sector using scale to mitigate the risks.
- Nigeria’s banks are cautious and see acquisition as a dangerous route to growth, Sigma Pensions’ Okunrinboye says.
- Past banking acquisitions have usually revealed too much in the way of off-balance-sheet liabilities that need years to fix, he says.
- “I don’t think the appetite is there any more. It just never goes well.”
- Only a desire on the part of the regulator to reduce the number of banks would change that caution, he says.
- The smaller Nigerian banks face the greatest dangers, Okunrinboye says, as second- and third-tier banks tend to operate in higher-risk markets.
Due to Nigeria’s very large informal sector, many companies have no credit history, Okunrinboye says. “Most credit-worthy customers are going direct to the market to issue.” Pension funds, meanwhile, are not allowed to make direct loans.
The bottom line: Nigeria’s pension industry needs a modernised and liberalised set of investment options if it is to maximise its potential.
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