Nigeria, Africa’s third largest economy, is tipped to be
one of the most exciting markets for leasing in the next decade.
Asset finance growth is outpacing impressive GDP increases in the
Western state but, as Lola
Ayanbunmi discovers, the industry is in need of some
finishing touches before it is ready for mass
investment
For those looking to name the most
promising leasing markets of the near future, Nigeria is a strong
candidate for consideration.
Go deeper with GlobalData
Africa’s most populous nation, having seen
asset finance grow from a multi-million to a multi-billion euro
industry within the past decade, could now be on the verge of a
real leasing explosion.
For a start, it is an economy that is
incontrovertibly in growth mode. Last year the country achieved a
GDP of more than €334bn, which places the country as the world’s
31st largest economy, and the third largest in Africa.
Despite the global crisis, Nigeria has
experienced healthy GDP growth in the last few years. Even during
the height of the global 2008 recession Nigerian GDP grew by
6%. Last year saw a real growth rate of 6.9% and the Central
Bank of Nigeria has projected growth of 7.2% for 2012.
What’s more, leasing growth is fast outpacing
GDP expansion – figures from the Equipment Leasing Association of
Nigeria (ELAN) show a national new business volume of N623bn (€3bn)
for 2011, representing growth of 15% year-on-year.
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By GlobalDataThere is growing interest from outside
investors too. Earlier this year Bismarck Rewane, chief executive
officer of Financial Derivatives Company, a Nigerian economic
research and analysis house, announced that the country attracted
€1.1tn worth of foreign investment in 2011, a figure up 12% from
the previous year. And late last year, ratings firm Standard and
Poor’s announced a positive outlook for the country’s credit
rating, which currently stands at a healthy B+.
In terms of the leasing landscape, growth in
the transportation industry, which includes public and corporate
buses, taxis, haulage vehicles and even bulletproof bullion vans,
is the clear driver for current expansion, with leasing business in
the sector up 19% year-on-year. The largest factor behind this
growth is the development of mass government transport schemes in
mega-cities like Lagos – Nigeria’s former capital and populous
coastal town.
In addition to transportation, oil and gas
equipment leasing also grew impressively by 18% in 2011
year-on-year. This is despite the fact that crude oil and gas
production fell by 3% during the same period, according to a report
by the Nigerian National Petroleum Corporation. Manufacturing,
telecoms and agricultural asset leasing are also steadily
increasing, with year-on-year growth ratesof 5%, 8.3% and 3.7%
respectively.
Altogether, Nigeria has burgeoning demand for
capex funding, strong financial services ambitions and a vast
equipment base, but still needs several crucial ingredients before
its leasing industry is ready to take off in earnest.
Leasing bill
The first, and most imminent, of these
is a framework of leasing law.
Tim Onwumah, regional manager of vehicle and
asset finance at Nigerian bank Stanbic IBTC, explains: “The power
of the lease is essentially in the strength of its documentation.
And the strength of the documentation is the ability to provide
solutions for the various scenarios that may arise in the course of
the lease – a kind of backbone.”
Currently, the backbone is missing. Instead,
what governs the leasing industry is a mix of common law and parts
of other legislation, such as the Companies Income Tax Act,
Companies and Allied Matters Act and the Banking and Other
Financial Institution Act.
But none of these are specific to the leasing
industry.
The national leasing body ELAN, established in
1983, has been pushing forward the agenda for a leasing bill (also
referred to as the ELAN bill) for years. Now it has the support of
the Central Bank of Nigeria (CBN), which is planning to make a
further push for the law as part of a package of financial laws
called the Financial System Strategy 2020 (FSS 2020).
The name FSS 2020 is derived from the World
Bank’s projection that Nigeria is likely to become one of the
world’s most developed economies by 2020. In fact, accountancy firm
PwC projected in a report last year that Nigeria could be the third
largest world economy in 2050 if the country ‘continues to follow
growth-friendly policies’.
Ugo Okoroafor of the CBN explains: “The whole
idea is that we want to make Nigeria Africa’s financial hub. We
agreed that every financial institution and sector should have this
objective in mind. It was in this context that we decided to put
the equipment leasing bill alongside other financial bills that we
want implemented.”
The other areas covered in the FSS 2020 scheme
are securitisation, warehouse financing receipts and secured
transactions, Okoroafor adds, “so the ELAN bill is not being done
in isolation. We’re behind it too. We want to build a credit
society and to have credit you need an appropriate legal and
regulatory framework. We’re also thinking about collating a
national collateral asset registry.”
At the time of going to print, the
comprehensive bill has passed the first reading in the national
assembly, but not for the first time. The bill was initially
drafted in 2006, but has expired during its legislative process as
a result of the change of governments. The delay in a law which
could underpin the leasing industry which is growing from
strength-to-strength could deny the industry the foreign interest
it deserves through a lack of security and confidence from
international players.
Why has such a crucial law been delayed? “I
don’t know, because the stakeholder has done a lot to push the bill
through, and it’s frustrating,” says Ayo Taire, group financial
controller of C&I Leasing Plc, a major Nigerian leasing
firm.
The frustration of setbacks to the bill among
figures in the leasing industry is palpable. Onwumah from Stanbic
puts it like this: “Delays are caused by the usual bureaucracy that
goes with political processes, particularly in a relatively young
democracy like Nigeria. A lot of it is to do with personal
interest. Issues that personally affect house members will get
pushed through faster.”
Even if the bill does go through in good time,
ELAN has other legislative obstacles stacked against it. Leases in
the country are currently subject to a 5% VAT and a Withholding Tax
of 10%. These taxes have been heavily criticised by ELAN as VAT is
paid on the leased asset at the time of purchase as well as when
the asset is leased – amounting to double taxation. However, the
body is determined to remove this penalty in the future and states
that “[ELAN] continues to intensify its activities of lobbying and
interaction with relevant authorities and bodies to achieve this
objective.”
As the legislative obstacles begin to clear,
what will the emerging Nigerian leasing market look like?
The obvious major component is oil. As the
world’s 9th largest exporter, it is unsurprising that Nigeria’s oil
& gas sector leasing grew 18% year-on-year in 2011.
However, the country’s current government,
presided over by Goodluck Jonathan, has made clear its
appetite for economic diversification.
Growth industries
In his 2012 budget speech, Jonathan
stated that his government will implement a programme of intense
development within the residential construction and mortgage
sector, while the Federal Housing Authority and the Federal and
State Ministries of Housing have announced plans to build a minimum
of 800,000 low-medium cost housing projects all over Nigeria.
Jonathan said: “This will give the necessary
stimulant to the sector to accelerate its development and also help
to reduce the cost of construction, therefore energising the
construction industry.”
In a country of 150m, this means serious
potential for construction equipment lessors.
Another fledgling industry, mechanised
agriculture, may generate significant demand for equipment finance
if the sector can be developed quickly enough to make it a
reasonable risk prospect.
Ahmed Adekunle is CEO of Dynamic Agrosol – an
agribusiness organisation that provides agricultural equipment
leasing within the country, as well as agricultural project
development for communities and NGOs. He describes the lack of
funding from financial institutions in the country. “I have not
been able to get any banks in the country to finance any
agricultural projects. Agriculture in this part of the world is
considered by some as one of the riskiest business ventures you can
go into.”
Agrosol mitigates some of this risk by leasing
to cooperatives of poor farmers, who group together to hire
equipment, which they pay for over several years at a commercial
interest rate. But Adekunle thinks the situation cannot improve
without an influx of investment and government support into the
industry.
“The government has realised that it has to put
work into the agricultural sector. They realise that agriculture is
the largest employer of the population – at about 65%. Agriculture
needs to develop to sustain that portion of the population and to
essentially move most people out of poverty.”
Nigeria used to be a key exporter in certain
commodities – for example, it was the world’s leading palm oil
exporter in the 70s – before the development of the oil business.
The agricultural sector has been left stunted ever since. As
Adekunle explains, the federal government is now trying to
revitalise the industry through incentives such as subsidies for
farming equipment, in hope of pushing the sector away from
subsist
ence towards
mechanized farming.
Pioneers
Foreign-owned manufacturing companies
offering captive finance could benefit from this drive to
industrialise the country’s agricultural base, perhaps through The
Industrial Development (income Tax Relief) Act, designed to
give various tax-breaks to joint venture or foreign wholly-owned
companies deemed as being ‘pioneers’.
The National Council of Ministers describes
these ‘pioneers’ as companies which operate within industries that
are deemed as having a lack of serious activity, or as it states,
“in an industry which is not being carried on in Nigeria on a scale
suitable to the economic requirements of the country”.
The manufacture of vehicle components, solar
energy, telecoms as well as agricultural equipment are just a few
of the 71 pioneer industries being offered tax breaks. Pioneer
status also grants tariff concessions, reduced levies, financing
and export support.
The Pioneer scheme, then, is one way that
foreign investors can take advantage of Nigeria’s appetite for
industrial growth.
In addition, a number of countries, including
the UK, France, the Netherlands, Belgium and Romania have entered
into a double taxation agreement with Nigeria. There are also a
number of statutes that provide tax holidays and exemptions for
foreign investors.
Encouragingly, several financial organisations
have already taken the plunge into funding Nigerian asset
finance.
Foreign banks already involved in Nigerian
leasing firms include the Belgian Investment Organisation, Afremix
and the Netherlands-based development finance bank FMO.
The FMO is a public-private partnership bank.
With just over half of the bank’s shares state-owned, it
concentrates on investing in financial institutions and private
companies in developing and emerging economies.
In 2008 the bank embarked on its first
investment in a Nigerian leasing company and agreed a $10m
five-year loan with Aquila, one of the largest leasing companies in
Nigeria, with the aim of providing leasing services to SMEs across
the country.
Fedja Canters, investment officer at FMO,
explained why investing in Nigeria was an attractive proposition
for the development bank. “The size of the country, the business
culture and the amount of opportunities there are over there,” he
says.
The absence of the leasing bill was something
the FMO needed to consider. “We do find it striking that it’s still
not finalised. It makes things a bit uncertain from a regulatory
perspective”, explains Canters. But he maintains this alone did not
outweigh the positive factors of a potential deal.
Another fact that reassured the bank in dealing
with Aquila was that one of its partners Africinvest, a private
equity firm, had already invested in Aquila as a shareholder. “That
gave us some comfort – the fact that we have some additional
management capacity there on the board of directors.”
Since the deal, the FMO has been impressed with
certain aspects of Aquila’s business. Canters highlights the
leasing firm’s strategy towards the market. “They don’t only lease
new equipment, but also second-hand. They have a strategy to focus
on the lower end of the market.”
The underlining assurance for the Dutch bank
however, was the track record of the Nigerian lessor. “They had
three to four years proof of already being profitable. With the
lack of competitors in the market and the quality of the people in
the firm, we saw Aquila as being potentially one of the biggest
movers in the industry.”
When offering advice to other foreign leasing
companies considering Nigeria as a potential market, Canters
continues: “really check who you want to do business with. Ask
around in the market and check which products you want to offer,
for example, whether to personal consumers or large oil
companies.”
Canters also warns against narrowing
opportunities in terms of location. “A lot of people focus on Abuja
and Lagos, but of course there are a lot more people living in
Nigeria. And last but not least, be optimistic regarding the
opportunities. I would encourage foreign leasing companies to take
a look at Nigeria and do a proper market scan because there is very
large potential there.”
C&I Leasing is another Nigerian lessor that
has generated interest from foreign investers. It is currently in
talks with Standard Chartered Bank in the UK about financing the
acquisition of six ships, while the International Finance
Corporation (IFC) of the World Bank Group has also shown interest
in a funding deal with C&I for consumer leases and public
transport equipment.
Nigerian companies are generally open to the
prospect of working with overseas investors. Agrosol’s Adekunle
expresses his dismay at the lack of funding support from national
banks. “My company is the only one in the country leasing
agricultural equipment and no bank has financed me because they
don’t understand what I am trying to do. If a foreign investor, for
example a development bank, looked at what we were doing, they
might consider it as a solution to mechanizing farming in Nigeria
and Africa as a whole. Foreign companies can see opportunities
where Nigerians can not.”
Of course, the question that foreign companies
may ask is “if their banks are not financing them then why should
we?”
Adekunle says “foreign companies need to
understand the mindset of the Nigerian banker. All they want is to
make money quickly. There are bankers who are meant to be
developmental partners. They are supposed to advise you on how to
do your business, but they don’t do that here.”
He echoes Canters’ comments about a firm track
record. “If a foreign potential partner wants to do business here
they should look at how we have been able to structure our business
plan. We are not asking any banks to take unnecessary risks –they
should go to people who have been able to prove themselves
first.”
Onwumah from Stanbic also advises foreign
players to get involved in the country’s leasing sector. “You have
no clue how much opportunity there is in Nigeria. We have our
issues, but the Nigerian economy, especially when it has
accelerated, represents a great opportunity for those who know what
they are doing.”
“When I’ve worked with foreigners that have
come here, I tell them that they are in an emerging economy, that
they must adjust, understand the differences and tailor things to
suit. It is advisable to come here.”
