The financing of oil still dominates the Nigerian market. But following a shake-up of the banking system and the overhaul of the government, the landscape for doing business in the country is about to change, writes Rebecca Spong.

Oil dominates the books of trade banks active in Nigeria in the same way it overshadows the African country’s export volumes.
One banker active in Nigeria tells GTR that oil accounts for 60% of his bank’s structured commodity finance portfolio in Nigeria and the rest of Sub-Saharan Africa.

Although a profitable business in the good times; with oil making up 90% of Nigeria’s exports, the country’s economy is extremely vulnerable to any shocks in global oil prices.

In the first half of 2009, Nigerian exports dropped to the equivalent of US$15.3bn, compared to US$37bn recorded in the second half of 2008.

Such collapses in trade volumes clearly affect trade finance teams’ ability to issue letters of credit and other trade finance instruments. On a broader level, Nigerian banks as a whole were over-exposed to the downstream oil and gas sector, and they too took a severe hit as prices plummeted.

Coupled with the global financial crisis and the overhaul of the Nigerian banking system by the Central Bank of Nigeria (CBN) headed up by the newly appointed governor Sanusi Lamido Sanusi mid last year, inevitably credit lines by international banks to Nigeria were reduced or cut altogether.

There has also been political uncertainty concerning the Nigerian government, after President Umaru Musa Yar’Adua fell ill and left the country for treatment in Saudi Arabia towards the end of 2009. Yar’Adua returned to Nigeria in February this year, and passed away on May 5, 2010.

President Goodluck Jonathan is now in charge, and is putting into place some radical reforms. In March he sacked the entire cabinet, replacing it with a new cabinet consisting of only 13 of the 38 ministers from the previous government.

Against this backdrop, the appeal of Nigeria’s oil sector endures. This is in part due to the rising oil prices, but the swift and effective action taken by the CBN also brought comfort to bankers.

Speaking at an IFC conference in late April, Kenny Aliu, head of structured finance at First City Monument Bank (FCMB), told delegates:
“Nigeria has seen consistent growth over the past few years, FX reserves have grown, we have a fairly stable political regime, and I think we have a capable and aggressive regulator for the banking industry, which should bring confidence to both local and off-shore investors and creditors.”

Oil appeal

The roots of the oil market’s appeal lies with Nigeria’s inability to refine its own crude oil. This proves to be a win-win situation for banks. They can finance exports of crude oil out of Nigeria, as well as finance imports of refined petroleum products.

So appealing is this sector, they can overlook, or at least deal with, the regular bouts of violence and frequent kidnappings happening in the oil-rich Delta region. Attacks by militant groups on oil companies have had a dramatic affect on Nigeria’s oil industry, leaving it unable to fulfil its potential for oil production, given the capacity of its reserves.

Yet banks seem to be relatively unperturbed, and interest in Nigeria, and in turn its oil sector, is recovering, as Christian Karam, head of Africa desk at SMBC Europe says: “We are seeing an increased interest in Africa in general, and Nigeria in particular given the abundant natural resources and significant business opportunities.”

David Colgan, director, business development, at Zenith Bank adds to this, saying: “I believe Nigeria is one of, if not the largest, issuer of letters of credit (LCs) in the world. It imports billions of dollars of goods every year, with a lot of this done on LCs. For many western banks, LC confirmation is a good business to get into. It is self-liquidating, you know what you are exposed to. So Nigeria is an attractive market for those looking to do African trade finance business.”

John Vowell, director, structured trade finance (STF), at FBN Bank (UK) sees a lot of Nigerian oil deals as well:
“We have a large oil portfolio in Nigeria. We are very active on the NNPC-PPMC [Nigerian National Petroleum Company – Pipelines and Products Marketing Company] that’s predominantly supporting oil products being delivered into Nigeria.

“We also support trade transactions with refineries, and finance off and on-shore storage facilities.”

New landscape

But the environment for international banks and traders looking to finance oil could be about to change, as power is being shifted away from the multinational oil firms to Nigeria’s own oil companies.

In mid-April, then-acting President Jonathan signed a local content oil bill that will give domestic firms priority when it comes to bidding for oil blocks. It also requires foreign companies to hire more local workers. At present, most of the white-collar jobs and those in engineering and maintenance are taken up by foreign workers.

In a signing ceremony, President Jonathan said that the bill “seeks to address the compelling need for us as a nation to have indigenous participation in the industry”.

The government hopes that the law will generate tens of thousands of jobs and be highly significant to local oil firms such as Oando or Zenon Petroleum. These domestic firms will be given priority on oil licences even if their bid is 10% higher than any other. The foreign oil firms such as ExxonMobil will have to send in regular reports to a newly created Nigerian Content Monitoring Board to ensure they are complying with these new regulations. With the bill only just signed, it is too early to measure the real impact of the plans, but it will inevitably give more power to the indigenous firms, changing or increasing their need for financing.

On a practical level it will affect those working within Nigeria, with some already reporting that it will be difficult for foreign firms to find local resources and people to meet the pre-set quotas. There are complaints that Nigeria’s education system has not produced a high enough calibre of potential workers, while the country’s failing infrastructure means that much of the equipment needed by oil firms will not be of an acceptable quality, and will still have to be imported.

Yet, the intention of the bill is to ensure the local Nigerian population can access the wealth the oil industry generates, rather than it being siphoned abroad. Such measures are hoped to placate those rebels in the Delta region intent on attacking the multinational companies, and put the peace talks back on track.

Indeed, there is a real need to ensure that the country’s oil revenues start to seep through into other sectors.

In a speech given by the CBN governor Sanusi at a Nigerian university earlier this year, he blamed the mismanagement of oil revenues as partly responsible for Nigeria’s economic problems. “The economy was not able to absorb the excess liquidity from oil revenues and foreign investments in productive sectors. This resulted in significant flows to non-priority sectors, and to capital markets,” he asserted.

One outcome of this flow of funds resulted in Nigerian banks providing margin loans to investors to buy back their own stock, and ultimately the Nigerian stock exchange grew and grew, until inevitably it burst.

“Instead of raising concern among the regulators, these developments were cheered by most, and voices of protest were waved aside with arrogance. In 2007, the Nigerian Stock Exchange was the best performing bourse in the world, even though there was no evidence to suggest a commensurate improvement in the fundamentals of real sector corporations,” Sanusi explained.


Banks involved in trade finance and structured trade finance are beginning to look at opportunities to support Nigeria’s real sector – beyond oil.

The country’s cocoa industry, for instance, is showing solid levels of growth. According to research published earlier this year by Intercontinental Bank, cocoa exporters enjoyed heightened demand as a result of global shortages, with prices rising in the second half of 2009, and set to improve throughout 2010.

Some structured commodity finance teams have successfully arranged a number of transactions in this sector.

One such deal was the US$15mn cocoa financing for Agro Traders (ATL) arranged by Nigeria’s Stanbic IBTC Bank and signed last November. It was structured as a pre-export facility, divided into two tranches, and used to support ATL’s purchase of cocoa beans from the 2009/10 Nigerian cocoa bean harvest.

The facility made use of one of Standard Bank’s dedicated trade finance lines from the multilateral IFC, which was granted to the bank to bolster trade in Africa. ATL is one of the largest cocoa exporters in the country, handling over 15% of the country’s cocoa output annually.

Olu Ajayi, head of structured trade finance at Stanbic IBTC, explains that the bank is looking to be more active in financing softs. “Our pipeline of trade deals in Nigeria is increasing, be it vanilla trade transactions or more complex structured trade transactions.

“We are working with producers and exporters across all commodity sectors in Nigeria, in particular the agriculture commodity sector to support the federal government of Nigeria efforts in regenerating the agriculture sector not only for food security in the country but also to diversify the country’s foreign exchange earnings.”

John Vowell’s structured trade finance team at FBN Bank (UK) has also been busy in the cocoa sector.

One example of a recent deal is a one-year US$5mn facility for Nigerian cocoa processing company, Multi-Trex Integrated Foods. The deal was structured as an uncommitted revolving collaterally managed stock finance facility, financing the purchase of cocoa beans in a warehouse for processing into cocoa butter, cocoa liquor and cocoa powder for sale to approved offtakers.

The facility finances the entire cocoa production process financing right up until the sale of processed goods to offtakers. FBN was sole arranger of this transaction, and unlike the Agro Traders deal, it did not receive support from a multilateral.

Multi-Trex is a privately owned liability company that started up as a cocoa beans merchant in the late 1990s, buying beans from a select group of local suppliers for export to its customers located mainly in Europe. It expanded into cocoa processing in 2003 after taking advantage of the Nigerian government’s positive policies on non-oil exports.

Banking uncertainty

Although the likes of FBN Bank (UK) and Stanbic IBTC have seen some success in implementing structured trade finance facilities, the reality in Nigeria is that often such structures are not suitable for Nigerian corporates.

As yet, many companies don’t fully understand the level of documentation and security required to borrow under an STF facility, and traditionally have secured transactions against their property rather than their stock or trade flows.

With this in mind, other Nigerian banks are only tentatively looking at doing STF facilities, with the majority of business still being dominated by LC business.

But even this traditional business has been limited by the repercussions of last year’s CBN action against the banks.
Richard Parrett, head of trade finance, Intercontinental Bank (UK), based in London, comments: “Ten years ago most trade deals were done with corporates on a cash-covered basis before moving to credit lines, which is obviously the preferred method of financing. But now the hardest hit banks are dealing on a cash-covered basis – except with the largest clients.”

Yet in spite of these challenges, Parrett does see signs that business is improving. Parrett’s Nigerian business involves confirming LCs for his parent bank as well as LCs for the other Nigerian banks that don’t as yet have licences to open in London. He is now seeing these non-London-based banks actively looking for credit lines again.

“Once we agree a line, the banks are using them quickly. So there is business out there. Nigeria is a massive market.”
He notes that aside from oil, there are other interesting sectors, including motor vehicles in the Far East and electronic equipment. “We are seeing a lot of LCs where the beneficiaries are in China and India.”

Risk appetite

For most of the banks, both Nigerian and foreign, there remains an air of caution in the market.

The CBN completed its audit of all banks in November last year and recapitalised the failing institutions, opting to fire the heads of these banks, rather than letting any institutions fail. However, all banks are still required to submit their year-end reports and reveal the extent of their loan provisioning.

This deadline for submissions has since expired, but some banks are dragging their feet and have still failed to publish their results. From May 3 those banks are liable to pay a daily fine.

A continued lack of transparency or clear idea of the losses suffered by certain banks has made it hard for trade finance teams, particularly those in the London-based banks, to approach new clients for business.

One exasperated banker remarks to GTR: “The challenge is when we go out to clients and they ask ‘can we see your accounts and see your parents’ accounts?’ And they can’t see them at the moment. I don’t quite understand the delay – you might as well just get them out into the market.”

Until all reports are submitted and analysed, foreign banks looking to work with Nigerian banks will continue to be wary.

Christian Karam at SMBCE recalls the impact of last year’s audit: “The news of the audit sent shockwaves through the international banking industry, and foreign banks had no other option but to follow the developments in Nigeria, and listen to the announcements of the Central Bank.”

He notes how banks’ fears were placated by CBN announcements, and that staff at the bank had made themselves available to international institutions with exposure to Nigerian banks, and confirmed the CBN’s commitment to fulfil all the commercial banks’ obligations without any delay.

The long-term impact of the overhaul of the banking sector will be determined once all the year-end financials have been released.
For some Nigerian banks there is already a sense of acknowledgement of why they failed. Speaking to conference delegates, FCMB’s Kenny Aliu noted that lessons had been learned.

“The first thing was that we had sectoral exposure to too few sectors with an over exposure by most Nigerian banks to financing downstream oil and gas marketers. The second challenge we faced was concentration issues in margin finance.”

He also observed that banks did not have robust risk management tools in place.

Also speaking at the conference was Banjo Adegbohungbe, deputy general manager, global trade group, from Access Bank, who saw the CBN action as a good thing in the long-term.

“Intervention has clearly shown the market who the good banks are and who the bad banks are. The bad banks are gradually being recapitalised and in the meantime the others will grow significantly.”

He adds: “In spite of these challenges Nigeria still grew. We see a bright future for the country.” His optimism is reflected in the stabilising of pricing on Nigerian risk.

At the end of 2009, some bankers estimated that Nigerian bank risk had increased by 1 – 2% depending on the strength of the bank during the crisis. More recent estimates from the market cite 3% per year as the average price on a Nigerian LC.


Confidence in Nigeria remains fragile. Omaru Badara Sisay, head of Africa forecasting at Exclusive Analysis, comments: “In our view, confidence in the banking sector is still dented, although the conclusion of the audit has helped ease fears about the viability of the sector as a whole.

“Until global conditions improve and the tighter regulations proposed by Sanusi take hold, we are unlikely to see risk appetites return to their previous levels.”

Banks that are overly wary of returning to Nigeria may, however, end up losing their foothold in the region and see the Nigerian banks themselves, via their London outposts, gaining ground.

FBN Bank (UK) is an example with Vowell’s STF team managing to successfully get accepted into the banking groups for some top-tier trading companies.

Intercontinental’s Parrett also sees some potential opportunities: “We, and I think other London-based Nigerian banks, have had a breakthrough in leading some of the smaller commodity deals in the market, and the traders are willing to deal with us.”

It is often the case that the larger global banks do have some appetite for Nigerian risk and will often front large oil deals, but then quickly sell on the risk. This is where banks such as Intercontinental and others can get a slice of the huge volumes of trade going in and out of the country.

Parrett comments: “Big banks continue to source deals even if they don’t have the appetite, but are large enough to front the deal. Even those large banks that were used to taking on larger ticket deals are now tending to sell off up to 90% of the risk.”
Superficially, appetite for Nigerian deals is returning, but as yet the global banks may not have enough hunger for the vast number of Nigerian transactions.

Many of them are still dealing with their own internal problems closer to home, leaving the door wide open for players with more risk appetite to secure a larger market share. GTR