PayTech

Nigeria Inter-Bank Settlement Systems is Africa’s Greatest Fintech Firm – Dr Nevin, Chief Economist, PwC

PwC
Chief Economist, PwC Nigeria, Andrew Nevin

Dr. Andrew Nevin, the partner and chief economist, PriceWaterhouseCoopers, spoke with Arise Television and explained that NIBSS is at the centre of how banking system works and the firm is not-for-profit organization. Excerpts

The Nigerian Diaspora is an important part of our economy we don’t look at can you speak on this segment of and its importance?

We got interest in this is because, for all the years I have been here, people kept saying we are an oil economy and so we started looking into it and we actually figured out that more money come into the country through the Diaspora remittances than oil in fact.

So our biggest export isn’t oil, our biggest export out of Nigeria is actually people. I think the way the economy needs to be structured; we need to think about that.  I think there is a lot of implication in having such a large and powerful Diaspora from Nigeria.

PWC’s latest report revealed the steady growth of remittances over the years. What do you think is contributing to this growth?

Well, I think a few things are going on. Firstly, a lot of people who left the country, I think in the 1990s or the 1980s, the educated Nigerians, have been more successful and they now have more money. They grew up here and so they still have ties here and are supporting it and sending money.

Then we have the new Diasporas we are seeing of recent, especially in Lagos, you see a lot of brain drain out of telecom companies, out of investment banks, out of commercial banks out of people like us, people going particularly to Canada. So what happens when you have a young professional is that they go in the first few years, they try to get established but after that they then try to send remittances.

So, you have got the older group who are very successful in their careers and a lot of them are in the US and the UK. So what happens is that you have more and more people going to the diaspora every year and so all and all, it just snowballs over the last decade.

Your report states that most of the money comes from the US, what is the major cause?

We have said this before but just to reiterate, the Nigerian Diasporas in the United States are incredibly successful. We have all heard the news in the last two weeks about the arrest of about 80 Nigerians as a result of internet fraud and this damages Nigeria’s reputation

But actually, Nigerians in the United States are very successfully Diasporas, they earn more than the average American which is remarkable. And Nigerians in American according to what I have read are the most educated group in terms of the percentage of post graduate degree particularly in medical profession, pharmacist, doctors and they have a lot of successful people. So, they are really driving this programme and they want to support Nigeria.

How much comes in from America?

I think the number this year is going to be about $25 billion officially I think over half of it comes from America. But even that number, in the report we just quoted the official number because that is the way it is reported. But we all know that there is unofficial remittance and it is hard to capture.

The unofficial is what we call the Aboki system where you call some guys; you want some pounds you have naira, so your naira goes to someone that needs naira but no money crosses the border because naira is going from one account to another and pounds is going from one account to another.

So, that doesn’t get captured. So, I think the World Bank, may be the African Development Bank, estimated that number about 50 per cent of the official remittances. So, we might say the United States have the official remittances of $12 to $13 billion and we might have another 50 per cent of unofficial remittances.

What about remittances from the informal sector?

Well, if we have projected the official remittances will be $35 billion in 2023, so if there is another 50 per cent it will be $50 billion. But if you put this in context, the total import in Nigeria should be about $40 billion.

So we always talk about oil, we talk about foreign portfolio investment we talk about aid but those numbers are relatively small. The oil is reasonably large, but aids and even the net portfolio flow are not enough to keep the naira stable. What is keeping the naira at N360 is the diaspora remittances.

Are there any inclusion policies the federal government can put in place to attract Nigerians in Diaspora?

Mrs Abike Dabiri is the head of Nigerians in Diaspora Commission. I think she is working out a strategy to do this and we have been discussing. I think people now recognise the last six to eight month, how critical it is. From our view point, a couple of things are essential: One is that those in the Diaspora right now are a little bit weary of the federal government.

They are sending in money directly to individuals they want to support or causes they want to support. Seventy per cent of the remittances are for consumption and are for very essential things like healthcare, education, feeding, buying a house for their parents for example and I don’t think people want that to be interfered with.

But the federal government can do a lot more, to include the diaspora and reach out to them and this would be achieved by having a very good electronic presence. So, 70 per cent of these funds go to consumption and the surveys we have done, those in Diaspora want to invest 30 per cent of that money but it is hard for them to find investments.  Sometimes, they have investment that is not quite official and it goes sideways and they want more structured investments.

So, the federal government can play a role that could help structure these investments in way that the diasporas feels it can put its money in, with proper monitoring and get proper information and know what is happening. Then, I think we can see this number increase but I do think it has to be private led.

Are you suggesting a Diaspora investment commission? But how would people trust the federal government with this?

It has to be private-led. If you look at the most successful organisation in the country, it is the Nigerian Sovereign Investment Authority and it was set up by the federal government. But if you look at it, i am not even sure, but there may be one government official on the board, but it is private-sector driven. They are very professionally run, they are very careful on capital and investment they need to make.

They are trying to figure out how to unlock the pension money but they are not going to rush into that because they recognise that pension money has been safe. I think it’s laudable for something like this if we can have a private led group were the federal government is supportive of it and maybe have one or two representative  that could work  but what would not work is a government driven initiative.

In the past few years, we have seen the Sukuk bonds tied to infrastructure. Can the capital market tap into these funds?

If driven by the private sector. That’s the point. I don’t think the federal government can be the prime driver but they can be in support of it just to make it work. Just to take it a bit further, one of the things we say in the paper is, we actually think that the states should be reaching out to the diaspora.

If you look at for example India, they have very successful diaspora; they have huge remittances which started in the 90s since the economy opened up when they had immigrations. India often engages with diaspora though the state level because someone may be more attached to the state or the region of India than to India as a whole.  We will like to see the states start their own diaspora engagement programmes so that people who are indigenes from those states can be brought in and feel like they are contributing.

Some key position members are diaspora returnees, why haven’t they looked critically into harnessing diaspora engagement?

If we go back to what I said saying earlier about oil, we seem to believe that we are an oil economy. We always repeat that 90 percent of export is oil, 70 per cent of the government revenue is oil and so no one is paying attention to these financial flows. I think economists are partially to blame because when I learnt economics, no one thought about remittances because it wasn’t a very big number.

But now, three per cent in the world live in the country other than where they were born and they transmit almost $700 billion officially and again if there is another 50 per cent unofficially, then $1 trillion has been sent by remittances. But in classic economics, remittances are not an obligation. And in legal obligation, it is not considered an export; in the mathematics and I think now we need to recognise the fact that it is a big flow.

Is there any other untapped revenue from these remittances?

Well, one big issue is the cost of remittances. Why people would not want to use the official channel is a very expensive proposition. The World Bank has estimated that for Africa, the cost of remittances is up to nine per cent and they have set a goal of being a three per cent, because it is costing Africans in the diaspora a lot of money. And that is why the unofficial channel is so powerful because effectively it is costless. I use the Aboki system because it’s less expensive, if I need pounds, I’m paid in naira.

It is faster and I perceive it as safer for me and it has never gone wrong for me. So it’s no wonder in the diaspora if you are sending 200 pounds, 500 pounds, a thousand pounds you are going to use that system because the official channel like banks and Western Union are so expensive. So, I think one strategy for the government is that there should be sustainable development goals that talks about this in the World Bank on how do we get the diaspora remittance cost down. 

Can the silver bullet crack this cost be blockchain?

I think it is a very interesting question. Yes, let’s not call them crypto currencies, let’s call them digital asset.

So how does a digital asset work?

When we transfer money in the system we have just described, it goes to individuals, it goes to the bank, it goes to the clearing bank; it goes to the local bank, so there are many steps in the chain and that’s one of the reasons why it is so expensive. When you transfer a digital asset, it is peer-to-peer and it effectively almost has no cost to it.

I mean the cost of some of the digital asset that I’ve seen and technologies is 0.001 per cent. So now, let’s talk about it specifically, so with digital asset, we started with something like bitcoin, very complex,  difficult to explain, not backed by anything, so there is a lot of controversies, but where the conversation has moved now is the asset back digital asset or stable digital asset backed by a currency.

So, the most famous example of this of course is Libra. So what is Libra about? Libra is a digital asset that is backed by assets you understand. So bonds from Europe, United States, bonds from Japan for example mixed there so you can tell the value.

So that is backed by a custodian and you know the value of that. Therefore, you know how many coins they are in Libra coin and then you know exactly the value of Libra coin. So now it can be transferred peer- to-peer without going through all these steps and that’s the basic idea.

Now how does this reduce the cost? So If I am sitting in New York or in Canada and I want to send some money to someone in Nigeria, I can transfer them instantly peer to peer from my wallet that holds Libra to their wallet that holds Libra. So now they have the Libra in their wallet. They can take it, because the Libra value is very known in the system, they can easily deposit it to a Nigerian bank the Nigerian bank will give them exactly the value of the Libra.

But what’s the other thing that will happen if we did Libra or something like Libra? A person could say its sitting in my wallet and I need to go spend, people will start to accept the Libra and this is what the central banks are so concerned about was that if something that was that easy to transfer abroad and the value was so well known, you would just start to use also for your local purchases.

Why is this any concern if the goal is to transfer an agreed value?

Well, the different is that the transfer system today still uses the bank. When you have Libra in your wallet, it is your Libra. It doesn’t depend on anyone else’s ledger. I would not name any bank, they are all my clients.

If I have a bank account, the reason that I have a positive balance in the bank account is because the bank says on it ledger that I have a positive bank account.

The different with the digital asset is that it doesn’t depend on anyone else. That’s the distributed ledger, so it’s a ledger not under control of a single bank. It has to do with the individual. And then the transfer, I can transfer from me to you instantly without going through all of the banks, so that’s what brings the cost down.

How can Nigerian financial sector key into this huge foreign remittance we have been talking about?

Well, to begin with, one of the reasons why the naira has been so stable is because of these remittances. So if you think about the official remittances we have really two Forex market going on in this country. One is the NNPC transfers money into the federal allocation account. I may be incorrect, but I believe it was about $18 billion. So, it was less than the remittances in 2018.

So that’s one market, and of course, the Central Bank of Nigeria [CBN] controls that market and then some dollars are sold at N305 to parties. The CBN’s strategy is to direct the use of those dollars to its strategic usage. There isn’t a shortage of dollars. There is enough dollars in the system. That is the reason why the naira has been so stable.

But what can the banks do to advance this? If you look again at India or Mexico or the Philippians, the banks there have developed very fantastic product for the Diasporas recognising this market, connecting the market and that brought the prize down. In India, they don’t really believe there is as much unofficial Forex transfers because the official channels are so good, do you understand?

So why do people choose an unofficial way to transfer?

Because it’s more effective, faster, cheaper, safer. Until, the banks develop great product for the Diaspora, low cost, instant safe transfer, what will happen is that unofficial transfer would continue because you are not going to wait. So, I think the banks have got to develop some more sophisticated product aimed at the diaspora, tying together with banking. Of course, it is not really going to be easy in today’s world, particularly for Nigerians because of KYC, AML

What is going to be the role of the Nigeria Inter-bank settlement systems (NIBBS) in all these facilitation?

NIBBS is at the centre of how our banking system works and they are a not-for-profit organisation. But they are Africa’s greatest fintech with the way they set up the inter-bank system. It is more sophisticated than Canadian inter-banking and the BVN is an incredible innovation.

I think NIBBS would be at the heart of it and what I can say about the NIBBS is that they recognise all of these technological changes are coming and they have always been on the cutting edge of technology and financial services. I expect there are also going to evolve too.

Can you highlight some of the recommendations in your report?

We are saying to the federal government that they need an inclusion strategy and that of course, needs to be digital. You need a digital platform to engage Nigerians and that might not lead to more remittances right away, but it would lead to more engagement with Nigerians. Second step is to think of some kind of funds, but it has to be private-sector led that would have a very high degree of transparency.

And if there is that fund, it also has to be liquid so that an investor can go in and out. So it’s not like a private equity fund were investors put in millions of dollars for 10 years, you have to be able to go in and come out.

The third recommendation is really to take it to the state level. We would like to see some states step up or maybe on a regional basis and they can engage with the diaspora with opportunities to invest in their communities.