Financial Services

Regulating Nigeria’s Shadow Banking in MMM Aftermath

The size and rapid growth of shadow banking has been one of the most talked-about issues since the 2007 – 2008 global financial crisis. According to the Financial Stability Board, the shadow banking sector grew from $27 trillion in 2002 to about $75 trillion in 2015. The FSB said the sector – which encompasses all loosely regulated financial intermediaries such as money market funds, private equity funds, hedge funds, securitization, mobile payment systems, online lending platforms, etc. – now accounts for up to 25 to 30 percent of the total financial system.

The FSB was established in April 2009 during the London G20 summit in response to the financial crisis. Discussions around shadow banking have centred on the risks the sector poses to the financial stability of global economies.

Unlike the traditional banking sector, most shadow banks do not take deposits and, hence, are subject to little or no regulatory requirements regarding capital, liquidity and cash reserves. Shadow banks are also not covered by government deposit insurance agencies. As a result of this regulatory exclusion, shadow banks tend to take excessive investment risks in trying to maximize profit. But some of the funds they invest come from financiers such as banks, insurance companies, and pension funds.

The modus operandi and ubiquity of shadow banking are considered to be a risk to the financial system by international finance institutions and regulators, the International Monetary Fund, the European Central Bank, and the US Federal Reserve. It is believed that when shadow banks come under selling pressures from panicky investors, akin to “bank runs” in mainstream banks, it may result in forced asset sales that rapidly erode asset value and investments. When shadow banks (in this case structured investment vehicles, securities lenders, and brokerages) began a “fire sale” of subprime mortgage-backed securities during the GFC, the ensuing depreciation in asset value was catastrophic for investors.

Shadow Banking in Nigeria

Over the last decade and a half, the Nigerian financial services sector has developed into one of the largest and most sophisticated on the African continent. Total banking sector assets, for instance, has grown from about N2.5 trillion in 2000 to over N30 trillion in 2016; the insurance sector grew from about N25 billion in 2000 to about N800 billion in 2016. As for the pension industry, assets under management grew from less than N500 billion in 2004 to over N6 trillion in 2016.

But lurking under the shadows of the robust financial infrastructure are large numbers of bank-like entities that act as financial intermediaries for both businesses and individuals. According to the Central Bank of Nigeria, shadow banking activities can be seen in the financial derivatives market in form of commercial papers, interest rate swaps, and foreign exchange forward contracts. Given that this market is still in its infancy, however, the CBN and other regulators do not consider derivatives to be a threat to the country’s financial system. In fact, the CBN said in a 2014 report that “the financial derivatives markets in Nigeria are still evolving, especially in over-the-counter (OTC). Plans are underway to introduce a derivatives exchange, where more sophisticated instruments are traded to attract foreign investors.”

Notwithstanding the CBN’s disposition towards shadow banking in Nigeria, the industry has far more coverage, given the apex bank’s regulatory deficiencies and the country’s huge population without access to formal financial services. The operations of microfinance banks in Nigeria, for instance, have largely remained in the shadows, owing to the lack of regulatory resources to effectively supervise the industry. According to CBN data, there are about 1,000 microfinance banks scattered across the 36 states and the Federal Capital Territory. With the sheer number of these banks, the CBN is practically handicapped when it comes to exercising oversight functions and demanding compliance to prudential guidelines. This regulatory constraint has allowed most microfinance banks to operate as sub-optimal financial intermediaries, unlike their commercial banking counterparts. In 2010, the CBN revoked the licenses of over 200 microfinance banks after an audit revealed that most of the banks had breached regulatory requirements with high non-performing loans and inadequate capital reserves.

Closely related with microfinance banks are pyramid schemes, popularly known as “miracle” or “wonder” banks, that spring up from time to time, promising to pay outlandish interests on periodic customer deposits. The Ponzi schemes operate until new deposits slow down and eventually dry up. In the past decade, some popular “wonder” banks include Nospecto Oil and Gas, Manpower, Pennywise, WealthBuilders, Treasure Fund, etc.

The Mavrodi Mundial Moneybox (MMM), which originated from Russia, is a more recent example of one of these “miracle” banks. There have been numerous reports from around the country about people losing their savings, school fees, investments, etc owing to the crash of MMM. A case in point is that of Osakpamwan Amieomwanghi, a grocery store owner in Edo State, who invested N4 million in MMM just one month before the Ponzi scheme crashed in December last year.

“It is painful because that was virtually all the money – capital and profit – that l had. I have become a prayer warrior for the scheme not to crash, as many had forecast. I can’t remember how many nights I couldn’t sleep because of the money. I am not a gambler and l hate gambling, but l can’t explain how l fell into this,” Amieomwanghi told The Daily Sun.

According to a 2014 Enhancing Financial Access survey, about 37 million Nigerian adults, representing 40 percent of the adult population, are financially excluded. This huge unbanked population has encouraged the proliferation of informal financial intermediaries, such as rotating savings credit associations (ROSCAs), religious organizations, cooperative societies, and community welfare schemes. These unregulated institutions provide bank-like services such as savings, loans, insurance, and even mortgages for farmers, market women, civil servants, students, artisans, traders, etc. The operations of these informal financial institutions account for a significant part of Nigeria’s informal economy – which accounts for up to 35 percent of total GDP or about N40 trillion.

Regulating Nigeria’s shadow banking industry

The activities of shadow banks in Nigeria do not currently count as one of the main threats to the country’s financial system, as noted by the CBN. This is because the industry is still largely informal (with the exception of microfinance banks and derivatives); it is also small in size compared to mainstream financial institutions such as banks, pensions funds, insurance companies, etc.

Nevertheless, shadow banks account for a significant part of Nigeria’s economy and their operations impact the lives of millions of people. For instance, many depositors have lost their savings by patronizing shoddy microfinance banks; and there are numerous cases of fraud and embezzlement in ROSCAs or cooperative societies. The Nigerian Deposit Insurance Corporation estimates that about three million Nigerians lost over N18 billion when MMM stopped making payments.

Given that some of the shadows banks still provide benefits to the economy, the government must adopt better strategies for regulating the industry in order to protect innocent Nigerians and ensure economic stability. This can be done by increasing efforts targeted at formalizing the informal financial sector, improving supervision of microfinance banks, and reducing the unbanked population.

The CBN is currently heading in this direction with efforts such as expanding mobile payments services, extending its cashless policy, and implementing simplified know-your-customer protocols, etc. But these policy actions still require substantial more coverage, suggesting that more attention should be directed at creating awareness and improving financial literacy.

How technology will transform banking in 2016: Blockchain, digital challengers and IoT

Banks will come under increased pressure from tech giants
It is no secret that a major concern for the big banks is having their lunch eaten by the likes of Apple, Google, Facebook and Amazon. And we can expect these internet behemoths to build on their consumer relationships and make further inroads into payments next year.
Apple launched its Apple Pay mobile payments service this year, and others such as Samsung are set to move into the market with similar offerings too. While Barclays has its own wallet, Pingit, it will be interesting to see if other banks attempt to stake a claim in this market too, or leave it to the big tech firms.
“A concern that the banks have is the arrival of big ecosystems that will replace them, so Google, Facebook, Apple, etc,” says Alessandro Hatami, former digital payments and innovation director at UK bank Lloyds.
“These are customer-based. The customers are already users of these environments. If they start pushing financial services to their own customer bases, these ecosystems can potentially take customers away from the banks.” 
Philippe Gelis, CEO of P2P currency exchange Kantox adds: “These tech giants are unlikely to ever become banks, but they are best placed to build user friendly front-end tech solutions that answer to consumer demands for seamless payments and financial services.”
Digital challenger banks will ramp up competition on incumbent UK lenders
It may appear unlikely that one of the new challenger banks that have emerged this year will spell the end for the big UK banks, especially when considering the slow uptake of the account switching service launched in 2013.
But by building their offerings around digital services from the get-go, the likes of Starling, Mondo, Atom and – more recently – Tandem, offer an intriguing alternative that could reshape the banking landscape.
2016 will shed some light on whether these upstart challengers can steal a move on some of the incumbents as they continue to focus on improving legacy infrastructure.
Emergence of blockchain and bitcoin ‘unicorns’
Blockchain – the distributed ledger technology underpinning bitcoin cryptocurrencies – generated huge interest in 2015 and it is likely to continue in 2016 as adoption broadens.
Many banks are already investigating how they can utilise blockchain applications within their business, while IT vendors such as Microsoft are helping them create real use cases. At the same time, a growing ecosystem of startups are pushing the technology, which many believe has uses outside finance too.
According to Jeremy Millar, partner at Magister Advisors, M&A advisors to the technology industry, next year will see the emergence of at least five bitcoin and blockchain businesses with a valuation of more than $1 billion.
“These valuations will be built on the opportunity of selling products and services into the largest and most profitable industry in the world, not on subsidising consumer services to drive adoption or building audiences to monetise with advertising. 
“These new companies will have real lasting value; they’re not creatures from a fairy tale that will fade away when their valuations, which are based, appropriately enough, on leaps of the imagination, drop.”
Finance sector will reap benefits of the internet of things   
Financial services may not be the first sector which springs to mind when discussing the internet of things. But as this Deloitte report points out, the explosion of internet connected devices will provide better data for decision making.  
Auto insurance telematics and ‘smart’ commercial real estate building-management systems offer some of the more obvious examples. But using sensors monitoring the activity of agricultural or manufacturing industries could help inform investing or lending decisions.
Mike Laven, CEO of Currency Cloud, says this will provide opportunity for new players in the market.
“When IoT crosses with finance, we suddenly get an explosion of data. It starts to get interesting when it comes to figuring out how to use that to great effect – and more specifically how to monetise the use of that data is something new fintech entrepreneurs will be looking to figure out in the New Year.”
Banks will push wearables apps
While some banks had tested out wearbles apps on smartwatches before, the launch of the Apple Watch convinced more to get on board.
Nevertheless, applications remain limited. Balazs Vinnai, general manager, Digital Channels, Misys, says that it is not a lack of consumer interest that is holding banks back from further investments in this area. “Banks continue to face challenges with their digital strategies so it is no surprise only a small percentage currently support wearables.”
A recent report from the fintech firm claimed that while 96 percent of banking professionals polled believe that wearable tech will impact their industry, only 15 percent are currently rolling out their own. However, the majority expect to have done so within the next two to three years.
“It is critical for banks to consider new digital channels as part of an integrated strategy and evolve from first to second generation digital banking: switching digital from a supporting role, to the primary sales and communication channel for banks,” says Vinnai. “Reengineering processes around the customer is not easy, but banks must embrace digital banking to remain competitive and relevant.”


Are We Heading Towards a Cashless Future?

What the future holds for financial services may be the stuff of present-day science fiction – or something far more revolutionary If you’ve watched a sci-fi movie in the last 30 years, you’ll know what the future of money is – because no one ever pays for anything. From Arnold Schwarzenegger’s cab ride in Total Recall to Luke Skywalker getting a drink at a scary spaceport bar, nary a shekel changes hands. Which isn’t, it turns out, lazy scriptwriting – it really is the future of seamless payments.

Obsessed with removing the distressing, time-consuming and purchase-squashing horror of pulling a £10 note from your pocket, a host of digital startups, tech labs and major banks are looking to revolutionise every aspect of anteing up. They are turning to biometrics, data, artificial intelligence (AI) and even bio-implants to ensure you can leave your house, step into a driverless taxi and grab breakfast from your usual coffee shop without even thinking about payments. Indeed, the main reason for interacting with the smartphone or wearable banking app will be to manage your personal portfolio.

So dramatic are the anticipated changes that Francisco Gonzales, chief executive of Spanish banking giant BBVA, predicts the next 20 years will see an entirely new financial ecosystem being created, going from 20,000 analogue banks today worldwide to no more than several dozen digital banks. He predicts that diverse niche businesses will exist, but will be tied into the digital banks for the so-called banking rails that underpin transactions.

Predictions versus reality
Of course, nothing is as simple as this. For a start, cash is stubborn. The working man’s tax haven, hard to track and easy to spend, is outperforming predictions of its demise. In 2015 it was still the most popular form of payment, accounting for 48 per cent of all transactions, compared with 24 per cent for debit cards and 10 per cent for direct debit. 2015 was, however, the first year cash slipped below 50 per cent of all transactions. With just 34 per cent of payments expected to be cash by 2024, what will take its place?

Jesse McWaters, project lead of disruptive innovation in financial services at the World Economic Forum, predicts three key systemic changes: the triumph of the “default card”, the card that consumers use in online and mobile payments; expecting this to be a debit card, he predicts the death of the credit card; and he expects digital currency systems to modernise the payments infrastructure. What this doesn’t account for is the surge in innovation in financial technology (fintech), with challenger banks and new service providers hoping to use predictive technology and AI to overhaul lending, and introduce sweeping changes.

“The biggest change we’ve seen recently is that for the first time in 350 years, banks are interested in their customers’ experience – customers used to have to go to the bank, now the bank has to come to them,” explains Phil Cantor, iGTB’s head of digital. “In time, technology will help restructure the way banks work with customers completely. Right now, if I need a loan to pay an overseas supplier, that’s at least two departments at my bank. What customers need is a bank that can keep them liquid so they can order money into an account when they need it and pay it back when they have it.”

Mr Cantor points to Square, the payments platform now offering loans to its merchants without them even requesting one, basing the loan offering on the transaction volume it sees the merchant processing and repayment directly out of the transaction stream.

Taking lending a step further
Moving corporate banking closer to this fluid lending, iGTB recently launched sanctions screening, an AI which offers a natural-language contextual search of social media to identify high-risk clients, along with a wearables extension of its corporate banking digital enterprise platform CBX, offering the complete spectrum of transaction banking and aimed initially at the Apple Watch.

This kind of broad interface offers trusted banks a chance to move from traditional bank to bonafide consumer brands, argues Andy Masters, head of savings and wealth at KPMG. In the short term he envisages a near future where mainstream financial services brands such as Barclays would use technology that already exists to bring together all their pension, savings, borrowing and cash account values from any provider on the same smartphone app. Slightly further out, he predicts machine-driven financial planning advice, which will view assets and liabilities, understand a customer’s risk attitude, and recommend strategies in real time and prompt customer action.

“There are data privacy concerns, of course, but if you’d suggested ten years ago that private companies would issue people with a device that measures their health on a minute-by-minute basis, there would have been a big brother outcry,” says Mr Masters. “Then along came the likes of Fitbit. It needs an under-the-radar approach like the Fitbit, but banks could become the mobile equivalent of the old AOL home pages.”