Banks and construction financing in era of diversification
Nigerian’s Gross Domestic Product (GDP) has always had a significant share of the construction sector’s contribution, as much as three per cent. Although the sector has been severely affected by macro-economic headwinds in the recent past quarters, the sector still has a great potential to contribute significantly more in the short term, given the government’s current focus on investing in infrastructure as well as Nigeria’s demographic dynamics.
High construction demand
Nigeria’s position as Africa’s second largest economy and the economic hub of West Africa makes its construction industry a promising market for activities such as residential construction, commercial construction, and infrastructure construction. Due to its large population, the high rate of urbanisation and the resulting perennial housing deficit, the demand for affordable housing is robust.
There is also the latent demand for commercial and industrial construction such as standard office spaces in key states like Lagos & Abuja, and industries in the country’s Free Trade Zones and Business Parks.
Operating in Nigeria’s construction industry is not a walk in the park; hence construction industry players have had to, and are continuing to rely on the support of Deposit Money Banks (DMBs).
Nigerian construction companies often face tough challenges, some of which are: high cost of land, expensive imported materials and machinery, protracted government documentation and certification processes, numerous fees and taxes, and cash-flow shortfalls due to the government’s delay in paying contractors.
Funding mismatch also constitutes a challenge, as contractors typically need medium to long-term funding to execute construction projects, as opposed to short-term funding.
Deposit money banks in this case have been a source of invaluable support for players in this industry by facilitating short-term intervention funds, long-term financing, and advisory services.
Banks have now also gone on to provide clients with deep financial management and investment advice, to ensure that clients make sound investment decisions, and project finances are managed efficiently, with the goal of achieving significant cost savings and faster turnaround times.
Some Deposit money banks that have participated immensely in Nigeria’s construction sector include FCMB, First Bank and Guaranty Trust Bank who are partnering private sector investors and the Lagos State government in the development of the Nigeria International Commerce city, also known as Eko Atlantic City. The city will help meet the demand for world-class financial, commercial, residential and tourist real estate.
The project is indeed seen as a game changer, and will greatly enable Lagos State to achieve its aspirations of becoming the financial capital of Africa. It is expected to attract at least 250,000 residents and a daily flow of around 150,000 commuters.
It also contributes to saving the environment, as it will help in halting the erosion of Lagos State’s coastline. According to the Managing Director of South Energyx, the project developer, David Frame, credit facilities from local banks have been increasing yearly, and this in turn has opened up confidence from the global community, causing international financiers to look to Nigeria as a viable opportunity for investment.
Deposit money banks also participated in the provision of capital for the construction of a jetty for Nigeria’s largest fertiliser plant Indorama Eleme Fertiliser Chemical Limited, which was built as part of the group’s expansion plan in Africa.
As a result of the successful injection of capital for the required infrastructure investments, Nigeria is set to become a net exporter of fertiliser produced by the company. The company produces up to 4,000 metric tonnes of urea per day. Some of the participating banks in this infrastructure project are Stanbic IBTC, Standard Chartered Bank and Access Bank.
Deposit money banks have also contributed to the growth of the construction sector by providing the funding necessary for backward-integrating the sector with other key aspects of the construction value chain like quarrying, packaging and transportation.
Following the institution of the backward integration policy of the government, cement producers were required to invest in local production facilities. According to Oxford Business Group, a business intelligence consultancy, the result of this was more than $6 billion in investment in the sector, and a major uptick in domestic capacity.
From 2008 to 2012 the Nigerian cement industry posted a compound annual growth rate of 43.5 percent, with domestic production surpassing consumption by 55 percent, leading Nigeria to become a net exporter of cement.
Some deposit money banks that supported this drive include Access Bank, Fidelity Bank, FCMB, First Bank, Guaranty Trust Bank, Stanbic IBTC, UBA and Zenith Bank. Banks like First Bank and Access Bank further provide flexible short-term facilities to meet working capital needs of the distributors of major manufacturing cement companies in the country.
Supporting a potential construction boom
As an emerging economy, Nigeria is expected to make huge investments in infrastructure to help it transit into a developed economy. Private and public sector investing in the upgrade and expansion of critical social-economic infrastructure will help provide better lives for its citizens, as well as create significant opportunities for players in the sector.
The construction industry will play a major role in ensuring that Nigeria achieves its infrastructural development goals. Deposit money banks are well positioned and determined to continue to provide the right financial support required to jump-start Nigeria’s construction boom.
• This article, written by the Bankers Committee of Nigeria, is the sixth in a series, focused on raising awareness around Nigerian banks’ efforts and most importantly educating the public on opportunities available to them to foster their active participation in our nation’s diversification efforts.