Why Number of Nigerian Banks Will Shrink by 50% before 2030

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May 22, 2018

I have looked at the operations of some of the largest Nigerian banks and can arrive at one thing: the big banks are now platforms of huge ecosystems. If they continue the separations from the second- and third-tier banks, the latter group would fizzle or become extremely diminished within a decade. Platforms are efficient because they have both internalized and externalized capacities to grow through network effects at increasingly lower marginal cost. GTBank, especially, is now a technology company with a banking license. With its position in the market, few entities exist that can dislodge it from its vantage position.

The best modern technology businesses are platform-anchored, not product-driven. Facebook is a platform. Apple has a platform. Google runs as a platform. These are among the most valuable companies on earth. As marginal cost goes lower in the internet age, platforms will rise because of the positive continuum of network effects. From aggregation construct to one oasis strategy, businesses with consumer focused frameworks are wired to succeed if they are platform-oriented.

From Marginal Cost to Profit Margin (Net Income to Revenue)

Our banks recorded one of the best years in 2017. They made real money. And they did this even “while the sector’s non-performing loans soared from 5% in June 2015 to 15.6% last October, the IMF says”. Simply, they can make money as technology companies and not as banks. So, if you expect them to be making money from interest, you have not understood that the banks are now technology companies. And they belong to the platform category where money comes in small bits. In typical tech companies, you watch for marginal cost, in the banks you look for profit margin. Last year, the profit margin was great (the cost-to-income ratio, CIR, follows thus).

Sources: Bloomberg and IMF staff calculations

I expect the profit margins to continue to improve. There is no reason why that should not be the case. The positive continuum of network effect will surely work for the banks. But as that happens, only the strongest will survive [I do note that most of the 2017 profits came from foreign currency floats, treasury bills, etc. Yet the transaction-fee income continues to grow faster than interest income. The banks will continue to innovate on extracting these fees].

Winner-Takes-All

The transition into a technology category means we are going to have some of the banks losing grounds. Yes, what typically happens in technology would happen here. As I noted few weeks ago in the Harvard Business Review, when the winner takes all, many casualties abound.

And global consumer technology powerhouses like Tencent and Google use customers to generate data that drives growth and revenues. These companies aggregate the data and scale massively with near-zero marginal cost, which is all made possible by the internet. Because they are ahead with an enormous number of users, they keep getting better, and the data they accumulate drives improvements in their algorithms. Changing this order is largely hopeless, and that creates a competitive stasis for local entrepreneurs.

In our banking, some of the leading banks will be the winners. There would not be space for the weaker ones because banks are simply competing within a technology domain and not necessarily banking ecosystems. Just as you cannot have many great search companies, social media companies and so on, Nigeria would not have many banks (yes technology companies with bank licenses).

These banks are now wired to make money under most circumstances: the currency crisis was a golden year for most.

Banks with net dollar assets were beneficiaries; GTBank, Nigeria’s most profitable bank – and its biggest by market capitalization – made N80 billion in 2016 from the devaluation, says its chief executive Segun Agbaje, or roughly $260 million at the post-devaluation rate.

FBN Holdings, the second-largest bank by assets, also recorded a N80 billion revaluation gain that year.

{…]

Zenith Bank, Nigeria’s biggest by assets, reported that derivatives income increased almost 250% to N68.7 billion last year – that’s equivalent to $225 million at the 305 rate,

Regulation Will Not Change the Trajectory

As our banks transmute into technology companies, regulating them would be more challenging. As I have noted, using Facebook, explaining that if you decide to break “Facebook apart, one part will grow and dominate others. This is possible because of the positive continuum of network effect where the biggest keeps getting bigger and also better. … You can regulate Facebook but another company will come to take over its position because in this sector, it is winner-takes-all. Yes, the best wins. Why? The scalable advantage improves with lower marginal cost”. Simply, there is an inherent nature that one company in a platform ecosystem will triumph at the end. Yes, few banks will win and many will go under in the retail banking sector.

And that is the problem. With their high scalable advantages running on aggregation construct, digital empires like Facebook and Google can take up offline empires, and may still not be within the crosshairs of the regulators. No one can effectively regulate Facebook, for example, unless you want another company (not named Facebook) to take its position. The operating structure of the business is mutative, and that means that it can grow through network effects which reward the best: a better service brings more users, and the more the users, the better the service, setting up a positive continuum. So, if you break Facebook, one part could grow and over time could dominate other parts, provided that part is the surviving best. Or another company with stronger advantage, post-Facebook breakup, would take over the new market and become the new category-king.

The Unification via BVN

With BVN (Bank Verification Number), many bank customers do not need to have many bank accounts. People have since consolidated especially in this age of huge fees where you pay for debit cards, and stamp duties for electronic transactions. Simply, customers will choose the banks they think are the best and stay with them. The rest would be closed, partly to avoid fees and mainly to simplify their lives. While banks would keep adding users [there are many outside the system], having more users is a lousy metric in Nigeria. What really matters in my opinion is the quality of the customers. As I noted few days ago, MTN Nigeria has seen ARPU dropped from $22 to $4.14 and truly struggles to make as much money despite having millions of more customers.

To help me understand the impact of WhatsApp and other OTT solutions, I pulled MTN Group financial report in 2006. In 2005 (yes 2005), MTN Nigeria was recording ARPU of $22. Today, it is $4.14.

So, you have to expand resources to support many customers and at the end you make nothing from many. The best customers are already with the leading banks. Leading banks like GTBank and Zenith Bank will become aggregators driving many smaller ones to edges. It is like Google Search giving Yahoo search a tough time. At the end, the best wins and most customers aggregate to it.

All Together

There is a massive consolidation happening in the Nigerian banking sector. I expect many of the smaller banks to exit the scene. Even if they remain, their impacts would be extremely marginal. Today, the market cap of GTBank is more than the whole sector if you remove the top two following GTBank. That disparity is showing in the profit margin of GTBank which is industry-leading (yes, that is the near-zero marginal cost typical in platform-based technology companies). With GTBank’s digital transactions growing 90% year on year, you would agree it is not a typical banking number. This summarizes it: add the impact of continuous digital penetration which will stimulate more platform benefits, the picture becomes clearer why 2030 may be too far for 50% of the players to exit (or if they remain, their impacts would be only marginal).

“There will be winners and there will be losers in the Nigerian banking sector as it becomes much more competitive,” says Ndiritu of Allan Gray. “I don’t think all banks are created equal in Nigeria.” There is still plenty of room for Nigeria’s banks to grow. The ratio of their assets to GDP was just 30% in 2015, compared with 55% in Kenya and 102% in Egypt, according to EFG Hermes, an investment bank. But with the easy money that has flowed from the state over the last couple of years drying up, it will be clearer than ever which ones are built to last.

Zenvus Boundary Now Supports Public Search of Limited Property Records

By

Ndubuisi Ekekwe

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May 22, 2018

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To Farmers & Franchise Partners:

We have added a new feature, public search, to Zenvus Boundary. Many of you have asked for a public way to authentic and validate your property reports [this does not substitute your government data if available]. Our farmers want ways to authenticate the survey reports before partners [for example, you want to simply show the existence of the farmland, location and size to an investor, etc].

This feature is now activated for all Zenvus Boundary Pro administrators (i.e. franchise partners). You should share the link with your farmers. Once you type the report SB code (the Zenvus code), the record will appear if we have the code in the system. To ensure privacy, search works with only Zenvus codes and not the names of the owners of the properties. Everything is done on real-time connecting to the Zenvus engine.

This is how the search outcome looks (see below). It does not provide the full survey report. It simply confirms the existence of the Zenvus code in the system and the name of the person the specific code is associated with.

By next week, the new feature will go fully public, and that means it would not require login for anyone with the SB code to search the records. We are testing to be sure the spam blocker is working well before public release.

Zenvus Boundary maps farm boundaries and populates them via GIS on Google Map where the survey maps can be printed in our portal. Farmers do this without any external help. And when done, register with their cooperatives which help them ratify the boundaries with governments. We use this to formalize farmlands and enable financial inclusion. Below is a sample result which the farmer can take to a bank as collateral for loans.

A farmer upon using Zenvus Boundary can download a PDF of the farm boundary report (sample below) in Zenvus account. The Zenvus Boundary Pro enables cooperatives or unions to have their logos and names emboldened in the reports for each member farm. We have some franchising opportunities here.

Sample of Zenvus Boundary Report

Why Nigerian Diasporas refused to be “Billionaires”

By

Ndubuisi Ekekwe

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May 22, 2018

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Few weeks ago, China announced a new US$47.4 billion fund to stimulate innovation in the country’s semiconductor industry. At the moment, China consumes some 45% of the global supply of semiconductors, but only 10% are made by Chinese firms. The goal is to become self-sufficient on semiconductors even as export controls and other regulations, largely from U.S., hit the country.

The Chinese government has, in recent years, stepped up efforts to create a domestic semiconductor industry to help supply its massive electronics market, signaling its intention to spend $161 billion over 10 years to further that effort. China currently imports more than $100 billion worth of semiconductors every year.

The latest China Integrated Circuit Industry Investment Fund will follow a similar fund launched in 2014 that raised about $22 billion, according to the Wall Street Journal report.

Fast forward – many Chinese engineers and professionals, in U.S. and other Western countries, are planning to move back to China to partake in this $47.4 billion opportunity. It is indeed a huge fund and would seed a new generation of innovators and makers.

This is the lesson for Nigeria: you do not tell a man who lives in London [New York, Tokyo, etc] to carry his bag and return to Lagos, Uyo and Aba when you have no plan for him. The China’s model is what Nigeria can replicate if the nation really wants some of its citizens who are living abroad to return.

The Federal Government has called on Nigerians in the Diaspora to return home and seize the various economic opportunities to make billions of naira.

The Minister of Science and Technology, Ogbonnaya Onu, made the call at an investment forum organised in New York by his ministry for Nigerians in the U.S.

Mr. Onu explained that various investment opportunities currently existed and were waiting for them at home, challenging them to take it before they were given to foreigners.

The former governor of Abia from 1992 to 1993, informed the Diaspora Nigerians that various research products with opportunities to yield billions of naira, were waiting for them at home.

“We are asking you to come and be billionaires. That is what we are asking you, not millionaires. Come and make billions.

I will remain with my thesis that government must pick say $3 billion from the foreign reserves and fund SMEs in Nigeria (there is another one for VC tax incentives). The funding will be given as loans tied to BVN. Any person that does not pay can never access the financial system until the person repays. If we do this, we can create 3 million jobs within a year. Our immediate challenge is funding innovation and I am confident there are many small companies in Nigeria that would need that funding.

If we have this type of incentive, we will see many VC funds making Nigeria home to explore opportunities in Nigeria and continental Africa. That influx of capital will have many multiples of benefits to our economy, our people, and the Nigerian technology space. Most especially our tech firms will stay home.

Yes, we have a tax problem but the VC industry is not going to fix that for us since it is not one of the areas where we have been unable to appropriately collect taxes. There is no tax avoidance in the sector because none exists at the moment in the VC sector. The goal of this incentive is to explore how to deepen our capabilities to ensure that future companies are created in Nigeria. Our Vice President has been working on improving the business ecosystem in Nigeria; making it easier for startups to receive capital would go a long way. A new tax regime for investors, especially at the early stages, would be strategic for the nation.

If you make $3 billion available under a solid transparent and competitive system, many people will return to combine forces with those at home. As those from abroad bring the little exposures they have and those at home bring their knowledge of the challenges and markets, Nigeria would experience a virtuoso moment of innovation. But the constant “begging” of our diaspora to return when there is no plan for them, in the country, will not work.

Nigeria needs a roadmap to get its people working for the nation, and the bold vision of China needs to be replicated. Our venture industry is still at infancy which means government must do the lifting up just as China understands that semiconductor funding is not matured and anchoring the stimulation in Beijing. Today, Nigeria’s semiconductors could be food processing, textile, light manufacturing and more; we certainly do not need semiconductors at this time. But we need government to inject funding where it puts its mouth. And when that happens, the diasporas would hear the call, return and then make the billions even as they build the nation with their indigenous counterparts.

The Promise of the new Konga as an Ecosystem

By

Ndubuisi Ekekwe

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May 21, 2018

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Many months ago, I wrote that Tecno, an African leading phone company, should invest on iROKOtv, the pioneer streaming video company, in order to have a platform since platforms have become very strategic in the consumer technology business.

iROKTOtv products are very popular in most markets Tecno operates. So this provides a natural ecosystem to help it drive further growth and lock customers in the video ecosystem.

We propose for Tecno to buy iROKOtv and use the product to deepen its capabilities in Africa and beyond. Our core idea is that Tecno needs to open a unit to be dubbed Tecno TV. It will be one place for anyone in Africa to access television, delivering unified TV experience. This ecosystem will meet the needs for TV shows, movies and broadcasting contents, across the continent. It will be TV and movie content-ready. Through the iROKOtv brand, it will close partnerships with leading local content providers.

[…]

Tecno will face real competitive challenges in coming years in Africa. Finding how to lock its present believers in a platform will be strategic. It has to do that as quickly as possible. iROTOtv provides a golden opportunity to make such “locks” happen. Tecno Mobile should buy iROKOtv and rebrand it Tecno TV, and rule the mobile device market in Africa, through service.

Tecno has been rumored to be building Tecno TV (they might have launched it; I am yet to use it). Interestingly, the opportunity may not be just for Tecno. If the Konga can build a royalty program on strong membership club [think of Amazon Prime] through clusters of its physical locations tied to its digital platform, we could see Konga well positioned in the market for multi-level partnerships.

Should that happen, Konga could also help iROKOtv, GoTv and DStv distribute their video contents by making subscriptions to those videos additional options on top of the regular club membership of Konga.

Sure – the major challenge remains the cost of bandwidth but there is nothing that stops someone bundling from an ecommerce platform to enjoy videos via kiosks which iROKOtv had created.

The Amazon Strategy

In U.S., premium cable channels like HBO and Showtime are garnering significant sales via Amazon, which sells the programming as additional options in its Prime video service. Over half of HBO subscriptions sold without a traditional cable systems and 72% of such Showtime subscriptions came from Amazon, Variety reports. Simply, Amazon has demonstrated that an ecommerce company can become an ecosystem for many other different types of businesses, charging “taxes” along the line.

Amazon has quietly become a major player in the subscription video sales business: Amazon Channels, the company’s platform for reselling subscription services like HBO and Showtime, now accounts for 55 percent of all a la carte direct-to-consumer video subscriptions, according to new data from The Diffusion Group (TDG).

53 percent of all consumers who don’t get HBO through their pay TV provider are purchasing it via Amazon channels, TDG estimated in a new report titled The Future of Direct-to-Consumer Video Services. Those numbers are apparently even higher for some of the other TV networks: 72 percent of Showtime subscribers get the network’s direct-to-consumer offering via Amazon Channels, and 70 percent of Starz a la carte subscribers receive it from Amazon.

The new Konga

If you look at the new Mission statement of Konga – “To create a trusted and vibrant retail ecosystem that facilitates trade across Africa” – you would not see any online or electronic thing in it. Simply, Konga wants to be an ecosystem for retail in Africa. And that retail does not mean only trousers, shoes and watches. It includes digital contents like books, videos and more. With Konga, iROKOtv will not need kiosks because Konga outlets could serve as service outlets. That is exactly the broad Vision of the new Konga which emphasized connectivity, growth and commerce, with no mention of “online” or “electronic”.

To be a powerful force for the Economic Growth of Africa
To connect Africans with each other and the rest of the world through Technology & Commerce
To be a company that employees, customers & society are proud of and depend on

iROKOtv kiosk — A Konga-iROKOtv partnership will make these kiosks irrelevant as Konga stores could serve

All Together

Nigeria needs to invent multi- and cluster-subscription service where people can get more value for signing up for many things together. The benefit is typically lower fee per service when services are bundled. Konga with its hybrid business model is possibly going to unify ecosystems, bringing digital and physical companies under one mammoth network, thereby helping customers to discover more value. This is why I am very bullish on the promise of the new Konga.

Four Magazines I Read

By

Ndubuisi Ekekwe

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May 21, 2018

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ndubuisi Ekekwe magazines — Copies of my magazines

For years, I have subscribed to four magazines – Forbes, Fortune, The Economist and Businessweek (now Bloomberg Businessweek). I have occasionally added Time magazine which I do off and on. The current subscription ends next month and I am not renewing – Time is becoming a discovery and adventure magazine which adds minimal value to me. I also have Wired but I merely skip the pages; their contents are not rigorous and analytical enough.

My best magazine is Forbes. It has the best people on covering entrepreneurial capitalism. The pages inspire me. Few weeks ago, I called them to thank them for putting a black man (software investing legend Robert Smith) on the cover of the 2018 edition of the Forbes Billionaires (I extended my subscription on that call). It was a huge change because for years, only black sportsmen rotate the covers for the few moments they put people of color.

Coming behind Forbes is Bloomberg Businessweek. When Bloomberg bought Businessweek, the company expanded the coverage, making the contents more global. I have not missed a version for more than a decade and subscription runs into 2025. John Micklethwait, the former editor-in-chief of The Economist, has improved all aspects of Bloomberg News.

But The Economist, on a nice subject is peerless. But most times, it is hard to get something that addresses Africa, especially for the North American edition. One special report – A Cambrian Moment- remains the best piece I have ever read on the The Economist. The full piece, typical of the seasonable The Economist’s Special Report, is iconic.

ABOUT 540M YEARS ago something amazing happened on planet Earth: life forms began to multiply, leading to what is known as the “Cambrian explosion”. Until then sponges and other simple creatures had the planet largely to themselves, but within a few million years the animal kingdom became much more varied.

This special report will argue that something similar is now happening in the virtual realm: an entrepreneurial explosion. Digital startups are bubbling up in an astonishing variety of services and products, penetrating every nook and cranny of the economy. They are reshaping entire industries and even changing the very notion of the firm. “Software is eating the world,” says Marc Andreessen, a Silicon Valley venture capitalist.

I really like business and I like to hold a copy of Fortune 500. It reminds me of the power of markets with margins, and the possibilities of human visions and their capabilities. I wish there is something closer to it for Nigeria and Africa in general. Such a magazine in Nigeria could have provided thesis on what works and what does not work as you digest revenues of leading companies chronologically arranged, year after year.

So, it was exciting, today, when I noticed that Fortune had unveiled the 64th edition of Fortune‘s Fortune 500 list of top U.S. companies. Walmart generates half a trillion dollars yearly on revenue and tops the list. Apple brings in $229 billion as the largest technology company (by revenue). Of course Apple commands the largest market cap at about $850 billion and also holds the title of the most profitable U.S. company at $48 billion.

There are many things to look for in Fortune 500. For years, I always consider this: the threshold to make the list. For 2018, a company must have generated at least $5.4 billion on revenues to be in Fortune 500. That number is about 6% more than last year. Simply, that means there is growth for some of the biggest American companies. Fortune Global 500, a global version of Fortune 500, would likely mimic the same trajectory.

Forbes has its own list – the World’s Billionaire list (i.e. the World’s Richest People) and the Forbes 400, a list of America’s top 400 richest families.

When you look at these lists, you will marvel at the regenerative capabilities of the U.S. economy. As GE fades, Facebook blossoms; as barons exit, dropouts take their positions. As you read them, you get inspired that if you work harder and smarter, you could experience breakthrough at your level.

Certainly, it is a message of optimism, and it delivers energy that men and women could achieve. You celebrate men who became legends by being the best on something and the markets rewarded them. You aspire to emulate them, by working harder to find success at your level.

There is power on positive thinking, Norman Vincent Peale would write; Nigeria needs journalism that injects energy in the lives of people. I want to see annual ranking that chronicles entrepreneurial capitalism which can inspire young people to work hard and find success.

COMMENT FROM LINKEDIN

It’s not the size of GDP or amount of money in a country’s vaults that gives it the toga of developed or advanced economy. There are many stars that must align, you cannot decouple them or even attempt to leapfrog them.

Our journalism hasn’t gone beyond the primitive stage, because our education system is also within that bracket. The health sector is in identity crisis, after which we can attempt to discuss growth in that sector. Our banking sector isn’t advanced either, yes, many of them declare huge profits not because they are highly innovative or fantastic, but rather it’s part of a broken system, which oftentimes hands out greatest rewards to those who work least.

Our polical and democratic governance is suffering the same, not much progress has been made.

So, before our journalism must attend such height, many stars have to align, at the moment, that’s not the case.

Why Number of Nigerian Banks Will Shrink by 50% before 2030