Banks are often accused of not supporting Nigeria’s energy industry enough in its development drive, preferring to finance short term loans, against the required long term ones. But in this interview with Sweetcrude team, the Head, Energy Unit, Diamond Bank Plc, Mr. Samuel Egube, tells Clara Nwachukwu and Ubong Nelson that Nigerian banks are doing enough, and even more than credited for. Excerpts:
How much of energy financing is Diamond Bank involved in?
Diamond Bank is the leading bank in areas of energy finance especially when u look at the food value change of the energy business of course there are other banks that are doing extremely well but we are one of the leading banks in that sector. There are several things we have done in Diamond Bank, one of which is in segmenting the sector. We drive a very strong oil service and maritime sector, we also are part of the banks that were selected based on our capacity and penetration in the maritime sector to manage some of the funds for NIMASA in terms of supporting that particular sector.
My MD has travelled to the UK to receive an award for our positioning as the leading bank in that sector in Africa by World Finance, which shows our penetration in that sector. What I will say is that we approach the sector from two perspectives, one, is to drive our oil and gas product programmes that allow indigenous players to actually access finance to support the business. We recognise that there are several weaknesses in that sector which I call the indigenous participants.
One of their challenges is that their businesses are highly unstructured, and we hope as a bank, we will participate to help in molding that structure. Also, they usually do not invest in their businesses, many times, as they make profits in the business, they spend it, so every new contract they have, their capacity to put in equity contribution to it is quite constrained. When you look at the way the Land Use Act is, not too many state governors are enthusiastic in issuing C of Os, they are quite slow, so you have a lot of the investment in landed assets unavailable to be used as security because of the title defect in the aspect that they don’t have C of Os. So these are the difficulties surrounding the indigenous people.
But we have a very strong product that tends to adapt to these areas, which help us to support them given their current situations. We hope that we would develop them going forward as they grow and then encourage them to invest in their businesses and it has worked very well.
In the working with the International Oil Companies, IOCs, we have gained significant amount of mileage. You can also realise that Diamond Bank is the leading bank by far in SME financing based on our involvement and contribution in that industry, such that the International Finance Corporation, IFC invested in us and there are several funds we have managed in the past, which Shell focused in the SME that has helped them grow in that sector.
Because we also support NIMASA’s effort, we are quite active and aggressive on the water logistics segment of the oil and gas industry, and we have done quite a number of vessels working with partners all over the world from china, USA, Singapore, Malaysia. We have led that sector for quite a long time and we are still growing. Basically, most of the rigs that came into the country this year, Diamond Bank participated quite actively in them.
Now, if we then go to the upstream sector, where we see the indigenous capacity evolving, that sector is a little more organised and why it is so is because it is big money, and to put such money together, it requires a big structure to form partnership and to work with people. This forces some level of structure in the business. And we have been quite active in that space. From the perspective of reserves base lending is a skill of a methodology for financing the development of field based on the result evaluation.
Diamond Bank has showed significant progress in that sector, and we currently have geologists working for us and we have other technical people like engineers, and in addition, we have retainers from specialist who work in that area with our in-house professionals depending on the area that drives our funding in that sector. In Diamond Bank our mission is to position the bank very strong to support the industry, and I can tell you that there are few of such transactions that have happened this year that we have not participated in which is significant amount of growth. That sector will grow even more as divestments occur.
In the past, you never see any upstream initiative happen in the country. For example, when Shell sells its crude, it goes to foreign banks and the Nigeria portion of that goes to the CBN so the banking industry did not see that and therefore the capacity, because its a dollar business which the capacity to made in dollars was not that strong but given the divestment now, a lot of participation by Nigeria companies and we are beginning to see the flow coming in and it doesn’t necessarily need to go to the CBN and the foreign company does not move it out.
The indigenous company themselves tend to employ a lot of the indigenous contractors to do their transactions, and it’s my desire that they do more of this, so you will see the dividend in Nigeria. Historically, what you see is a big fire in Bonga or somewhere, the people rejoicing are in Aberdeen or Houston, Nigeria don’t just see the crude.But now, with every new fire, you will see drilling companies in Nigeria being excited, and we have committed significant amount of funding to the sector this year.
Because it’s a competence driven sector, the reason why people don’t put their money there is not because they don’t have it or the capacity to put liquidity behind it, but because you need to know how to structure it, how to de-risk it and how it works. Like I said earlier, we have geologists and I’m an engineer, and I have worked in this sector all my life and we have relationships and retainerships. So when we have a deal, we put in all kinds of parties on the table to help the transaction go. Sometimes, people ask how we did the transaction, its pure knowledge of the sector, and I think we are quite strong.
The approach for Diamond Bank is that when there is a challenge, you require skill and know-how to solve that problem. What you have in areas where there are no skills, is that they just analyse and put money into it, but the structure of the money you put in doesn’t fit that structure. But because of the engineering background we have, we understand how the project works, and we understand where money is required, and we understand how to build a security structure around the project itself. This is because some of the things you acquire are equipment, so you use all kinds of project finance models to fund them, which is where we lead.
You talked a lot about some projects financing, but the experience is that Nigerian banks prefer to give short term loans, as opposed to the long term loans actually required by the industry. Why is that?
The truth is that, banking is a business and I’m certain that if you can get all the money just seating in the office, you wouldn’t come to me today to be interviewed and get all necessary information. So I don’t deceive people, I always want them to see banking for what it is, which is a business. So if am able to give you money today and another man comes to say, give me money today and I will give it back in 10yrs. I look at the return on investment to determine what will I do and I will choose the easier part.
Now as the economy begins to develop, the economy cannot be made up only of the easy part. so if banks begin to grow, they will come to the point where you cannot do only trade. Don’t forget, in the history of banking in this country, they were not doing financing but were just collecting deposit. But not, as capacity grew in the baking industry, collecting deposit cannot make you win so you then look for transactions and which are the easy ones to do. These are trade transactions, which cycle out in 60 and 90 days, and you will do your best deals first, which are the trade transactions.
So the second thing is that when you start looking at the long term transactions, they require cerebral capacity. I can tell you that our education system is very anaemic, and if you see the quality of people coming out and the quality of development in the banking sector because of the structure of the industry, clearly indicate why the skills are not very strong.
So if I do not know how to produce or solve a particular funding problem, when you present that problem to me, I’m likely to shy away from it and I wont do it. Knowing that Nigeria is predominantly a trading nation, and we are always importing and selling things and we have not been able to move the structure of this economy from a primary product nation as you see we even import petroleum products, which depict a bad system. What that means is that a preponderance of what you do will be short term.
But that is not all, because banking is an inter-mediation business and what that means is that the unused money that A brings can be used to support B. So if the preponderance of people who own money are trading, it means that the money they keep with me are trading money. If I take that money and put them in a long term money, you will have a mismatch, and when the trader comes back for the money which he wants to use to do another LC, it is not available.
So in terms of managing the trading function, you must try as much as possible not to mismatch too likely. Notwithstanding, there would be mismatches some of the times, there would be things that you would be able to go in and come out once in a while and very quickly. The reason why you can do long term transactions at all, is because somehow all those trading things are happening in a continuous basis, there is going to be a small element that will still remain because not everything will leave and there is one that would look like a long term, though in reality, there is a lot of short term funds that are overlapping. So we are able to then do some long term, or what I would call medium term because typically, you don’t have transactions longer than five years that banks are supporting. But there are some six or seven years, but that is how far you are able to go.
Also, we need to build the skills in the banking industry that allows the banks deliver solutions that are long term. We need to change the structure of the economy and how it is managed to ensure that there is growing activities in the sectors that are not trading. so you will then see a lot of money staying. But by and large, very long term projects all over the world are supported by funds that have their origin from government, and from institutions like pension funds.
Pension funds are long term money, so if you want to do a road that requires 25 year old money, what you should be looking at are funds coming out from pension money, and other kinds of investment like insurance. From the life insurance funds, you create incentives around them, like you give tax holidays to some people who put money In insurance funds because those are going to be channelled into long term projects.
What I think we should do in this country, is to encourage pension funds and to increase the scope of areas that they can be invested in. Right now, it’s so narrow and we are still looking at the capital market type transaction. But we need to increase the scope a little bit so that those funds can get involved in long term projects as well.
The government is dong some things, you see a lot of interventions and I think the CBN governor is fantastic in his views in this areas. You see a lot of support in this areas, you see the Bank of Industry,BOI, doing a lot of numerous things,yes the by can take risk but then the funding is being provided by a pseudo governmental agency.
Now the third and hard to do is because this environment is a high risk one and when you are in such an environment, you cant see too far and if you want to take a very long term project, you must be able to predict how things would be in that length of time, so there are all kinds of risks you face.
In an environment like Nigeria, you have the foreign exchange risk, because a lot of things are dependent on import, and then the area of supply, you have the risk that there could be foreign exchange mismanagement and things can change like. When the exchange rate moved from N119 to N150 to $1, people went mad with that kind of development. We also have interest rate risk, if you do not have a stable interest rate regime or a stable inflation rate regime over long periods, then you are not sure of what prices would look like and lending is about risk.
But interest rates in Nigeria are among the highest in the world. Why is that?
You know things go bursting when interest rates are changed. For example, I give a mortgage loan at 20%, tell me in reality, how much is that worth? It means for example, every five year, I will pay the same value interest rate, What role can the Federal Mortgage Bank play in ensuring that mortgage loans are low priced, and that those prices are typically stable because if you leave it to market forces, it can only be high.