Nwodo: Cash Problem in Nigeria is in Crisis Proportions

Despite the cashless policy of the Central Bank of Nigeria, the volume of cash in circulation is still very high, translating into highercosts for banks. Executive Chairman, XL Africa Group, Charles Nwodo Jnr, told Eromosele Abiodun what could be done to salvage the situation and other issues affecting the Nigerian economy. Excerpts:

The Nigerian economy is said to be growing at 7 per cent, as a player in the economy what is your assessment of it?
If you look at the formal perspectives and the various authorities that are interested in one form other the other in the Nigerian economy, I think there is a consensus that the Nigerian economy is at a turning point. Some of the measures that have been implemented by the present administration appear to be beginning to yield fruits. There is also a convergence of factors that are not necessarily a result of the deliberate action of government that appear to have worked together to position the Nigerian economy favourably with respect to other competitor countries and the economies of the world.

Now, the combined effect of all of these is positive —positive for Nigerians and positive for serious businessmen. Hopefully, if our governments at all levels are able to recognise what these opportunities portend for us, it is possible that this would be the turning point in the effort to reposition the Nigerian economy for sustainable inclusive growth.


What do you think is lacking at the moment in the system that government needs to institute to fast-track the country’s development?
I would say two things. One is the strengthening of our institutions. Quite a number of our institutions are weak and deliberately weakened through years of military rule and misrule. This was also done through deliberate efforts of certain elite interests to ensure that these institutions do not function.

But these are some of the pillars that support enterprise as we know it in other parts of the world. And the world cannot change the rules. There are rules that lead to success and there are rules that lead to failure and one of the rules that lead to success is that you must have strong institutions such as regulatory institutions, enforcement institutions, law and order and criminal justice systems that work, that are transparent and that are efficient. You must also have a government that is accountable. We have to embed accountability in governance. Today, this is not working because people are interested in creating opaqueness around government functions and also the finances of government.

But for the benefit of everybody, there has to be increased transparency and accountability. I don’t want to use the word anti-corruption because sometimes people trivialize the issue but we have to have a system that is fair to everybody, that punishes the guilty and rewards the good ones. We cannot continue in a system where the law actually protects the strong and appears to punish the weak for the simple reason that they are weak or because they don’t have money to pay for certain services. Now, you find a situation where somebody embezzles billions of subsidy funds or state government funds and for seven years the case has not even been mentioned in court. The suspect keeps applying for medical leave for check-up abroad and all that and for seven years he is walking around free.

And then someone who stole a tuber of yam or people who pick pocket at Oshodi are arrested and thrown into jail speedily. That is not the type of justice system that encourages compliance, patriotism and citizens’ to perform their civic obligations and gives every citizen a sense of ownership in the Nigerian enterprise. This is something that our political class and indeed the entire Nigerian elites have to come to terms with because everybody is losing in one way or the other. So, we have to make a deliberate and concerted effort to address this systemic structural problem for the benefit of both the present generation and the future generation.


Your sector in my opinion is less reported and people would like to know what you do. Give us an insight into what goes on in your sector and how the economy is affecting your business?
Let me put it this way, in simple terms, we are the engine that run the Nigerian banking system. We are the donkeys that are carrying the Nigerian banking system so there is a whole lot of back office activity that we perform for the benefit of Nigerian banks. For example branch development, deployment, management and even recruitment of most categories of staff, distribution of cash, processing of cash.

People just walk into the banks and issue cheques and collect money or they walk to an ATM stand and insert their cards and collect money. But that card that you collect on the ATM does not grow on the ATM. The cash you pick up at the banks was not built along with the banks. Somebody is responsible for processing those cash, making sure that they are fit as you pick them and making sure that they are at those locations as at the times you require them at the least possible cost to the banks and the customer that withdraws them.

We provide some of these services that are unreported as you said but indeed keep Nigerian banks in operation. This was our strategy and vision from the beginning may be because of my background. I identified some of the challenging areas for us while I was in the banking industry and decided to commercialise them into a business. So, we provide these services in Nigeria and other African countries where Nigerian banks operate. Thanks to us Nigerian banks are able to operate in some of these countries and replicate the same standards of service that are possible in Nigeria. What we have also done is given the strength, expertise and institutional knowledge that we have acquired working with Nigerian banks; we have exported these services to some other sectors like oil and gas, telecoms and manufacturing sectors. So, our clientele base has grown in some of these lines of service.


Today the major issue in the economy is dwindling price of oil in the international market, which has led to cash crunch across the states of the federation. What are the implications on our economy?
Well, I would say good and bad and I would start with the good. It is good because in the long term, it would compel us to diversify our revenue base as a nation. The present administration has done commendably well, perhaps more than any previous administration in recent memory, to diversify the economy. For example, you are beginning to see a lot of emphasis and focus on agriculture in a way that has never been done by any other administration. You are also seeing industrialisation. There has been serious affirmative action in terms of the government’s automotive policy for example. There are quite a number of foreign vehicle manufacturing companies that have either indicated an interest in setting up production plants in Nigeria or are already producing in Nigeria. We are seeing a scale up of activities in so many sectors of the economy and a lot of indigenous operators and foreign entities are actually investing in these sectors.

These are the ways that the government hopes to catalyse the economy and the more we can pay attention to these aspects and integrate backwards across the value chains whether it is in the production of finished goods, production of agricultural goods or production of even manufactured goods, if we can identify the value chain and the government proceeds with this sector specific value chain targeted interventions in some of these key areas, we will be able to jump start the diversification of the economy beyond what we have now.

So, the decline in oil prices and subsequent shortfall in revenue expectation by the various levels of government is able to force introspections into these kinds of initiatives then it would be a blessing in disguise and that is why I said it is good for us. But of course in the short term, we have to cope with the downsides like capital projects are going to be abandoned, a lot of government workers would have to be owed salaries, there are a lot of household that are going to be put through some inconveniences, and scale down of operations across the public sector at all levels of government. But these are to me short term sacrifices that we need to make in order create a better and more sustainable future both for ourselves and especially for the future generation. This is because the way Nigeria’s economy is configured makes it vulnerable to this kind of shock. That is why I said that the development is both good and bad for us.


The cashless policy of the Central Bank of Nigeria (CBN) has enhanced cash management in the banking system. How has the policy affected your business?
The cashless policy of the central bank is a welcome development to the extent that it helps the banks to reduce the carrying cost of cash. Cash is a very expensive commodity to manage from the point of view of bank financial management. So, reducing the volume of cash in circulation will translate into less cost and more profit for banks and more return for shareholders. So, that is positive. There is also the financial inclusion tendency that is envisaged for the cashless system. Because of the inconvenience of cash, there is a discouragement factor on people for patronising various kinds of banking services and the more the banks can migrate to non-cash payment options. Research has shown that it is positively linked to expansion of the banking space to attract more and more people into the banking system.

So, it is a positive development as far as financial inclusion is concerned. Of course you know the benefits that the economy get through increasing financial inclusion —you have more people patronising the banking system and therefore more resources within the controllable parameters of fiscal and monetary policies of government. So, it is a healthy development. Now for us as a business, it has no effect. The reason is that the cash problem that Nigeria has is in crisis proportion. In a simple arithmetic, our own estimation is that the currency in circulation in Nigeria is in the region of N4 billion. Now this does not even include the unaccounted currency in CBN vault that have been locked up for a long time. If you factor this in, you will probably add an extra N2 billion or N1 billion.

If you compare this with the South African economy that has a larger size than the Nigerian economy in terms of GDP size prior to the rebasing, the note in circulation in that country hovers between 800 million and 900 million. So, Nigeria is a cash heavy economy and part of the business case for our line of business is the desire of the CBN and the banking community to even attempt to reduce this heavy cash over hang in the industry. We estimate that what they will probably end up achieving over the next 10 years is 30 to 40 per cent reduction. Now, even if there is a 50 per cent reduction which I don’t think is achievable based on empirical research; that still leaves you with over N2 billion which for this economy is very hefty. So, our business is not threatened. And there is even an interesting footnote to this. MasterCard, the international payment company, I think every two years they conduct sector specific research in various aspects of the payment industry.

The last report I read showed that year-on-year for the four or five years, the volume of cash in European Union countries as well as in the North American economies have increased by three per cent. Of course, from a theoretical point of view, there is a correlation between global tension and the flight to cash. In other words, when people perceive that there is danger to their existence or livelihood, they tend to want to hold cash. You know cash is still the most popular store of value worldwide. So, perhaps as a result of the tremors you read about in different parts of the world, whether it is displacement by wars or displacement by natural disasters, people tend to want to hold cash as opposed to electronics purses. That explains the year-on-year increase in the use of cash. So, our business is not threatened in any way. For our entire lifespan and possibly the next generation, cash would still be the most popular store of value.


Security is part of your business; given the security situation in Nigeria today what advice do you have for government as to how private security company’s personnel could be deploy to assist government in tackling terrorism?
Very intelligent question! I think this is one sector that the government and our law makers have ignored over the years. Everywhere in the world, the private security industry is a partner to the law and order system. There are various ways of integrating them into the law enforcement and policing architecture of the nation in such a way that you increase the average number of foot patrol per citizen. You can also increase the number of armed security personnel per citizen. If you look at Nigeria’s population this is very low, there is a limit to how many police the government can recruit because of revenue constraints. A better way is to find how to better incorporate the better organised private security companies to carry arms based on certain limitation and controlled guidelines. After all, all the security personnel that work for us in the private security industry are ex-service men who even in their own private capacity have their own arms.

If the private securities are allowed to carry certain calibre of arms and ammunition that are auditable by the Nigerian Police Service commission (NPSC) you will see that it will enhance the capacity of the police to combat crime. There are certain duties that are currently been performed by the police and other security agencies that can easily be performed by private security companies. I am in touch with a number of operators to see how we can influence policy in this respect so that we can at least contribute to the transformation that the government wants. Your question is timely and we are working on it.


The major obstacle I suppose is the issue of trust. How do you convince government that private companies will handle the situation well without jeopardising the security of the country?
First of all like I said quite a number of our personnel are ex-service men-police, military and state security service people who have retired. They have gone through several training, service level screening. Some of them left the service because of issues like promotion, age and all that, even at that we do extensive background checking on all our personal because this is also the service we offer to embassies, high commissions and multinational companies. We do certificate verification, biometric capture and all necessary checks. This is something we do for a leaving therefore you can take it for granted that our own personal are adequately screened, rescreened and we have all sorts of things we do like guarantors. We insist that guarantors most be very eminently qualified before we accept them.

So there is a serious level of protection or credibility if you like that we have invested in our system even beyond what the government provide for the regular police, and soldiers. We do so because we don’t have government resources so we do extensive search and screening what it comes to this kind of situation. So it is in this line I can say that it is very easy to allay the fear of the general public and policy makers on the ability of our people to bear arms and control the use of arms. Yes it is not going to be an all comers affair. As we speak there is a level of licensing protocol for the use of arms. As a private citizen of this country you can apply for a licence for a fire arms today.

There is nothing wrong with private security firms do the regular police jobs. They are the same Nigerians that can apply for private fire arm, the only difference this time around is that they will use it in an organised manner and then would probably be required to provide an armoury in a detailed standard operative procedure for managing and monitoring the application and use of fire arms.


Recently you were inducted as a fellow of the Chartered Institute of Stock Brokers (CIS), what does this mean to you as a person?
It means the crowning glory of a professional stockbroker. I mean it is the highest level that the practice of stockbroking in Nigeria allows you to go and it is also bestowed on the individual by professional colleagues. When your colleagues in your industry recognise you and honour you it cannot get better than that. It is a vote of confidence for you, your capability, personal integrity because in stockbroking we always say our word is our bund. So for you to be a fellow it means you have attained the highest level of professional integrity. Investors can leave their funds with you and go to sleep, in Nigeria of today it is not a mean feet to achieve this. Also, it is a call to greater service, a challenge to do more both to the profession of stockbroking and humanity at large.

They say to whom more is given much more is expected and so in term of rededicating myself and supporting the profession of stockbroking it is a challenge. I will also be participating in the development of young stockbrokers through mentoring, resourcing and capacity building being available to contribute my experience and creating an avenue for fresh stock brokers to learn from my experience through the various workshops, seminars and conferences and teachings that the institute organises for up-coming stockbrokers. It is a call to greater service on my humble self and I accept it with gratitude to the institute and my professional colleagues for that recognition.


The conferment came as a surprise to a lot of people because you are not known as a stockbroker, what was the criteria use to access you? I ask this because from what you said earlier about what you do here I could not find stockbroking there.


Laughs…It does not work that way. I qualified as a stockbroker in 1995 and between that time and now I have worked sin investment banking, worked in active stockbroking and commercial banking. Without ignoring the rest of my engagement as an entrepreneur, I have also invested time resource and effort in support of the CIS work of popularising the profession, teaching and providing resources for the development of young stockbrokers through active participation in the capacity building and continues education programme of the CIS. You practice and support your profession in various ways. There are some that trade actively on the floor of the Nigerian Stock Exchange (NSE), that is just a small aspect of what stockbroking is all about.

There are also some of us that are providing the support through other equally important means. That is not diminishing the importance of trading on the floor but creating the enabling environment for stockbrokers to thrive and for young stockbrokers to learn and progress is as well important. That in the long run provides a favourable image for our profession. It is as important as trading on the floor, it is to this respect that some of us were recognised, it is for this purpose that I was told the CIS considered me worthy of recognition for my laudable contribution to our profession.

As a stockbroker, what can you say is different now from what it used to be when you were trading actively and what can be done improve on it?
I was attracted to stockbroking because of two things, one is stockbroking is a profession that requires the highest level of integrity. There are no other profession where your word is your bund, where people pay you in advance for deals you are yet to do. A stockbroker collects money in advance for deals that he has to do, it is not easy. In most professions, even after you perform the service they don’t pay you. But in stockbroking they pay you in advance for deals you have not done. This is in complete and total trust that you are going to perform. The second is stockbroking is versatile; you have to think on your feet, because some transactions are minute by minute. You don’t have time to do analysis or follow it up with secondary and tertiary analysis before you take buy or sell decision. You have to think within minutes because the market can move against you.

To a large extent, even with the relative slow development of the Nigerian capital market, it evolved until the global recession cut up with us. At the time, it achieved an all-time level of popularity and even activity volume was high, every company that was worth its name was listed on the NSE. When the market took a beating after the global financial crisis it was disappointing because not only did people lose money, but for us as active stakeholders in the capital market it was also a stock taking time. Many of our members had the fingers burnt because of margin loans. Some banks are still reeling from the concomitant effect on the banking system because of the losses and litigations and Central Bank of Nigeria (CBN) policies that appears to discourage margin borrowings and financial intermediation in the capital market. However, we are witnessing a rebound.

The good thing about the stock market is that there is no alternative in terms of transparency, access to information and structured funding. The money market is expensive; most business cannot survive on the basis of the pricing structure that is available in that market. Both the pricing and tenure structure is tough for businesses. In 90 day you are charged 26 per cent, you cannot set up a plastic company or manufacturing plant on the basis of those king of funding. The capital market is resilient because there is no alternative to it. Some of the fundamentals in terms of the structure of funding, the transparency and reporting requirement that is world class and recently the management system and technology that drives transactions there is efficient.

It is the most efficient market where transactions can be consummated without people getting to know themselves. If you have to do a money market transaction you probably have to know the treasurer, call the bank and all that. In the capital market you don’t have to do all that, once there is a willing buyer and seller you close a transaction. As you are closing the transaction there is no question whether value is going to be transferred, it is automatically registered. All of that combine makes the capital market the best option anywhere in the world, the value set is without comparism, there is no alternative to it, that is why the rebound is gradually been sustained.

There is also a renewed interest and you will also notice volumes have increased to all-time high. We are hoping that part of the effort of this administration will lead to the listing of certain critical sectors of the economy like the oil and gas, telecommunication and power companies. If these companies are listed and there is sufficient incentives or even compulsion for them to list in the market as a way of consciously and deliberately deepening the market and creating the necessary muscle and depth of liquidity in the capital market, then it will really be the engine of growth for the formal sector of the Nigerian economy. That is one thing the capital market does. Once you are listed in any tears of the market, certain minimum standard of governance and fiduciary operations compare you to run your business very well. So there is a connection between the viability and prosperity of the capital market and the viability and prosperity of the larger economy in my opinion.

Given what you have just explained, would you advise Nigerians to return to the capital market despite what happened when the market crashed?
I will advise them to consult their stockbroker and make investment decisions. The problem is that a lot of people in Nigeria are experts in everything. The stockbroker is trained to advice the investor, to stand as his representative. In terms of making a buy or sell decision, in terms of the structure of investment you want to make, the timing of the investment you want to make, the stockbroker is in a better placed to advice. I am not saying some stockbrokers were not affected themselves, I am saying that the average investor needs to be better informed and the easiest way to be informed is to use the services of the stockbroker because he is trained to read, interpret the market and stay ahead of the market.

So if you ride on the back of a stockbroker you will minimise the chances of getting beaten by the market. I think this is the right time to get into the market. All the indices shows that the market is rebounding. I can tell you that with the entire problem we have had, our market is still undervalued. Depending on what your investment appetite is, it is difficult to go wrong at this time. Even some of the stocks that lost so much value at the time have recovered, there is a correction. That tells you that the so called bubble was not a real bubble; it is just that there were certain fundamentals that needed to be corrected. As the rest of the macro economy is been stabilised, the rest of the market becomes more attractive.


Where do you see XL Africa Group in the next 10 years and when are you listing on the stock market?
As you know we have seven subsidiaries under the XL Africa Group, our latest effort is in the area of power. We want to do captive generation and intermediary services consistent with our service delivery division. We see a lot of opportunities for maintenance activities, provision of services and ancillary services that support the power sector just like what we done successfully in the banking sector. We are also present in a lot of African countries. Our vision is to at least within the next 24 months list two of our subsidiaries in the capital market. We would have done that before now but for the unfavourable condition of the capital market.