Home Interview CBN’s 75% CRR directive reduced investible funds

CBN’s 75% CRR directive reduced investible funds

by Business News Report

Recently, the Managing Director of Enterprise Bank, Mr. Ahmed Lawan Kuru had an interactive session with journalists. He said that the bank has been successfully turned around and several local and international investors have shown interest in acquiring the bank which may be sold by October this year. Below are excerpts of the discussions.

Introductory remarks
When we were appointed by the Central Bank of Nigeria (CBN) through the Asset Management Corporation of Nigeria (AMCON), we clearly said our mandate was and still is, to manage the bank commercially, professionally, to take the bank out of the woods and position it for better service delivery. In any organization, there are three things that are key to success. These include the people, technology and processes. When we came on board, we met people that were clearly de-motivated, people that were not properly trained and were not sure of the future. By and large, we have been able to motivate the people, train them, built their confidence and positioned them to be able to compete favourably with anybody.
We made it very clear from the beginning that we are not here for the size game. We are not interested in being number one, number two or number three. Our strategy has always been to be an efficient bank, a retail bank and to be a bank that is focused on helping small businesses. There is no way you can achieve that without having a highly motivated workforce.
So we invested a lot of resources towards building our people. The core banking operations that were supposed to drive our operations when we came on board, most of them were obsolete. So we have been able to upgrade some of our core banking operations, we have upgraded our servers and have equipped most of our branches with the necessary tools required for efficient banking delivery.
We were able to turn around the bank and right from the first year, the bank has consistently been profitable, which to us, is a very big achievement.

What is the time frame for the sale of the bank?

Right from the beginning, our mandate was to run the bank and run it commercially. So, even when AMCON decided to sell the institution and they appointed financial advisers to assist them, we decided not to get distracted with what is happening. I can confirm to you that we are not part of the sale process. Professionals have been appointed and they are driving the process. What we are doing is to run the bank. Of course, the timeline was discussed with us initially, but like every other thing, there were issues pertaining to adhering to the timeline, particularly in this kind of environment. Initially, the target was the first quarter of this year, but because we started very late, what AMCON has said is that the process should be completed by October. For us, we are ready, everybody is welcome. What AMCON decided to do was to leave the professionals to do their work such that there is no much interference.
About 24 prospective investors have shown interest locally and internationally.  A lot of them called us, including international financial institutions that showed interest because they have seen the financials and they strongly believe that the bank has a lot of potential. So we don’t know how many institutions finally made the list. But what we decided to do internally is to focus on running the institution; we don’t ask questions about what is happening and we have allowed those responsible for the process of divestment to carry on with the assignment. At any point in time, if AMCON requires our attention, they will surely get it. But our mandate is to run the bank and we have energized our members of staff because whoever is buying the institution is not buying the building, but they are buying the value, the customers, the quality of staff and so we are working on those mandates so that the valuation of the institution would be very high.

Is the bank out of the woods?
Since we came on board, we have been building the books on the average of 20 per cent yearly in terms of deposits, and if it is risk assets, we have done over 80 per cent. When we came on board, our loan-to-deposit ratio was less than five per cent, but today, it is in excess of 60 per cent because we are building our loan book. In terms of profitability, last year, we closed in excess of N11 billion. Our rate of return on equity is also increasing. Our return on capital is one of the best in the industry because you may see some banks declaring N50 billion, N100 billion, but what we need to look at is the capital deployed. If I am able to declare N5 billion or N10 billion on an equity of N25 billion and somebody is declaring N100 billion on a capital of N100 billion, it tells you the efficiency ratio.
Averagely,  on a year-on-year basis, we have been building our books by 20 per cent and that is why AMCON, because of the health of our financial figures and the achievements recorded so far, picked Enterprise Bank as the first bank it wants to showcase and to divest. The level of interest that has been shown shows that what we have achieved so far is commendable. Generally, if you look at the health of our risk assets, it is also solid.  You look at the character of the customers and the active accounts; we have almost 160 branches.
The way banking is today, it is not the number of branches that matters anymore. Banking now gradually is electronically driven and what we try to do is to take banking services into the office of the customers. So, most of the branches that we have, we are trying to make them more of e-banking to such an extent that from inside their offices, customers can scan documents, they can go to the internet and they can give you instructions without necessarily coming into the banking hall.
In fact, what most banks do is to come up with incentives to encourage people to use their ATM machines, to use their electronic cards so that they don’t necessarily need to come into the banking hall because that is why the cashless policy is being supported strongly by the banking community because it will bring down the cost of operations. Operational cost is very high in the industry today. That is what is contributing to the high interest rate. So if we are able to share services, bring down the operation cost and take our services to the customers, obviously it will bring down the cost of financial services.

What is your loan target for the year?
When we started, we started with an operating loan book of less than N5 billion in 2011. We have grown it to around N76 billion. Last year, our target was to do around N100 billion. We are a small bank; we don’t want to go back to the old days, so we are very conservative when it comes to building our loan book. This year, we intend to grow our loan book to around N130 billion because we believe that is what will support our balance sheet. But we are also very careful in diversifying our loan portfolio.
Now, it is very easy if you want to build your loan book, for example, in the oil and gas sector you can do that in one month with one transaction. But for a retail bank, you are trying to build the small loans and the small loans which we normally sell through products, take a longer time. This is because we are talking about N10 million, N5 million, lease and so on. That takes a longer time but usually performs because the irregularities are not up to five per cent. We have a lot of products to support our retail banking strategy.

Where is Enterprise Bank‘s strength?
Really, our revenue strength, just like most banks in Nigeria, is from lending because that is the core line of our income. We do have a lot of income that comes from fees and commissions, but ultimately, if you go through the balance sheet of most banks, between 60 and 80 per cent of the revenue base is from lending; we are not an exception. We make more money from lending even though quite a lot of fees and commissions do come either from foreign exchange transactions, treasury activities, but basically lending is where we make more revenue.
Now, public sector funds for us in the industry, before now was sort of cheap funds because there are no strings attached to them and usually you keep them in current accounts and it gives you a lot of leeway to have a lot of resources or to lend. So quite a lot of banks – some of the big banks and some of the small banks; realized that the composition of their deposit profile had a lot of public sector funds. Whether we like it or not, in Nigeria, the government plays key role in our economy.
They are the major source of liquidity in the economy. So banking with public sector funds used to be very profitable because it gives you the cash flow. Obviously, the increase in CRR would affect the investible cash flow that you have. At 75 per cent CRR, what it means is that if you collect N1 billion of any government deposit, N750 million of that money will be kept somewhere at zero interest rate.
Meanwhile, it is also part of your balance sheet. So, there are lots of other benefits that you usually get if a deposit is part of your balance sheet, but now it works on the reverse side. So, definitely it will affect the cash flow that we have. But I can also tell you that it is also a welcome idea. It is something that the banking industry can also deal with. What it means is that we now have to refocus and re-strategics and go after the small businesses.
If you recall, the level of financial in Nigeria is less than 60 per cent which means that there is still a lot of room to grow in other sectors. What is happening now is that most banks have gone to the drawing board to see how to compensate the exclusion of 75 per cent public sector funds from the funds that they have to play around with. So I will say it has affected the business because if you are going to Ikeja and you have a friend that has a boat, he will take you there faster than if you go through third Mainland Bridge. So, we are in business and once you are in business, you look for opportunities and public sector funds I can tell you, provides a lot of opportunities. But gradually, given the implication of excess liquidity in the economy as a result of the availability of public sector funds, I think the banking industry has come to realize that it is important that the mop up is done so that we can maintain price stability.
If you have excess liquidity in the market, what it means is that you will not be able to control exchange rate stability and inflation. So, looking at it from a professional perspective, I think it is something that the banking industry has accepted and identified with as a sacrifice to strengthen the banking environment because it will help exchange rate, it will help inflation and it will also regulate money supply in the market.

Which of the policies of the central bank greatly affected your operations, either positively or negatively?
If you ask me what CBN policy has affected us as a bank, one can selfishly say the CRR. This is because it had taken money that typically is free, away from me. If I have N50 billion which typically I was earning money from and you take it out, definitely there is an income loss to me. So, from a selfish perspective, I think that is a major policy that has affected us in the industry. But from a professional perspective, I think it is something that is necessary and something that we have identified with because in the last couple of years, what the CBN does is that most of these policies they bring it to the bankers’ committee, we discuss, agree, and some we don’t agree. Sometimes when you have the urge to make profit and you look at the larger economy, then you can see sense in some of those actions.

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