Blame the economy for high interest charges, says Uzoma Dozie
•Diamond Bank targets retail as next growth area
Uzoma Dozie is the Group Chief Executive of Diamond Bank Plc, contrary to public perception; he argues that the wide gap between savings and lending rate is not because of the banks’ greed, but the effect of the prevailing economic environment in which they operate. In this exclusive interview with Business Editor, CLARA NWACHUKWU, he speaks about Diamond Bank’s diversification, efforts to shore up capital base and other sundry issues. Excerpts:
It’s almost three years since you took over the helm of affairs at Diamond Bank, what would you say has changed, and what additional value have you brought on board?
I think since I came on board, we accelerated our retail strategy agenda. We’ve always had the notion to go retail, go into the corporate banking space like the public sector. In fact, it became the agenda because we went into a very successful organisational restructure where we quickly tailored retail at the heart of our business across all the branches. It wasn’t that we were leaving out all the other businesses but we are going to apply a retail strategy to all of them.
What has happened since then? Since then the culture of the organisation has changed. We have actually changed from a tie-wearing organisation to one that actually understands what the people want. Before we had about four to five million customers and now we have about 12million customers, and most of these customers are retail people who go about their daily life. One of the things I will say we have been successful at, and at the core of our businesses is also the change in the perception of what Diamond Bank is in the industry. We’ve also become a foster child for the future of digital banking especially in Nigeria. We probably have the best Mobile Banking App now in the industry. We have more customers in mobile digital financing services than any other organisation. If you add Diamond Y’ello, Beta Customers, and our mainstream customers, we have close to 10 million customers using, enjoying and benefiting from just doing their banking on a mobile phone, and getting the full banking services. For us, that’s the beginning of where we want to go to, and also changing our own definition of how successful and how big you are. You are as big as the customers you have that are actually benefiting from the services you offer. That’s our yardstick for measurement; how many customers do you have and how can you connect people with markets? That’s what retail is all about.
Many people believe retail banking was forced upon the industry on account of the treasury single account (TSA). Do you think so?
For us, we took a deliberate decision two years before the TSA sprung up. With a network of over 200 branches you can’t just rely on a few customers, because it has to be diversified. When we had to send the money back to the Central Bank, it didn’t impact on our business, because we had already commenced our journey. Also, retail has three sides – there is the deposit generating side, there is the transaction side providing enabling environment for people to access the money and pay the money, and there is also the lending side, and we had to increase the size of our lending, despit the challenging lending environment especially in the retail space. We are throwing resources at creating and being innovative about how we play in that space.
Regardless of what anybody is saying, there are many good Nigerians, so we’re going to start using financial and non-financial data points to take better decisions on lending to people, and that’s the benefit of having 80 per cent of your customers doing transactions on digital or electronic channels. It means that you can now start getting data points about what they do with the money, whether they are spending it on utility, and also when you start collaborating with other data gathering organisations that have relationships with our customers, then it means that we can lend to them. For us, we are pursuing a pure retail strategy where most of our deposits will be lent to people. Now in the banking industry, we are taking money from the retail space and lending to commercial and cooperate. For us, we want to change the way that is done and that’s a pure retail initiative.
You keep talking about the digital platform, and all that, and recently you won the Lafferty Award for the Diamond Y’ello Mobile App. How has this affected your bottom-line, if any, and do you think that the bank would have achieved this much success with it, if it had not leveraged on its relationship with MTN?
Diamond Y’ello is just good, and it’s not from Diamond Y’ello that we achieved our digital success; it’s actually from our existing customer base. We have over 10 million customers who are using mobile Apps to do their transactions. It means that a man who might be doing one or two transactions a day will not have to go to the branch to do them because he can do much more 24/7, as our bank is up 24/7. When I look at our dashboard on Saturday morning, people are still doing transactions anytime of the day – making payments regardless of where they are, so time has no limit. When I also look at the dashboard, I also see Nigerians in many parts of the world actually doing transactions, so our business is not defined by time or defined by geography anymore. What it means is that, although we are only lending 10 per cent of our business to retail, from a transaction perspective, things like COT have gone, and have been replaced by value added services from the retail space, and this is just the beginning. Every year, as we put more customers on our platform, we roll out more products and services. We are beginning to see more income. From a bottom-line perspective, the biggest is the cost of money, and with 60 per cent of my funding coming from retail, it means that my cost of fund is very low. It also means that my risks are lower, my deposits are diversified, so it is playing a very big impact, and it will continue to do so as we bring more costumers unto our platform.
…The second bit, about your relationship with MTN?
Everyone is talking about our relationship with MTN, but I believe that we were the third bank that MTN tried to partner with on a mobile strategy; there were two other banks before us. I don’t know what the special relationship was; we should have been the first if any. I think one of the reasons they chose us was because they saw what we are doing within the retail space; we had a similar purpose. We saw the market in a similar fashion, so it made it easier for us to come out with a solution that has acquired nine million customers. One of the beautiful things about the collaboration between the telecom industry and the financial institutions, is that under the Central Bank’s rule and regulations you cannot have exclusivity at all, so we are not the only bank that MTN is working with, but we are the only bank that has come up with a solution that works, I guess it just speaks to our capability in that area.
You did say that banking is no longer restricted by time or space since it’s now a 24/7 affair; however, digitalisation is limited by network availability. How are you able to manoeuvre these challenges especially in an environment like ours where we have many infrastructure issues?
I think sometimes we are very hard on ourselves; sometimes we think that because of network, transactions are failing. But we forget where we are coming from, and the successes that we are having. I will tell you that regardless of all the infrastructural challenges that we are having, we are probably more advanced from a banking perspective than many banks in developed countries. This is probably the only environment that I can carry my mobile phone especially in Lagos, on a weekend, without my wallet, without my ATM card, and do all my transactions, and people will accept it. If I really want cash, I go to an ATM and do a card-less transaction. How many places in the world can one go and use your mobile phones to make transactions and collect cash? If I want, I go to a shop, and I ask them for their 10-digit Nigeria Uniform Bank Account Number (NUBAN) number, I do a mobile transfer, and they get their money quickly once they get an alert, and this is a product we started only six months ago.
Even now, with Mcash, I can even go to the market place, working with the Nigeria Inter-Bank Settlement System (NIBBS’) Nigeria Automated Clearing System (NACS), which is working with the banking industry, we can leap-frog. Why do we need points of sale (POS) in Nigeria, when nobody likes them? It costs us a lot of foreign exchange to import them; then for the merchants, they pay a merchant service fee, they also get their money 24hours later. But with mobile to mobile payment, with Mcash, it just requires the Unstructured Supplementary Service Data (USSD). Even to solve the infrastructure problem of data, we developed a USSD payment infrastructure. It means that yes, there are challenges quite alright, but we are coming up with innovative and creative ideas. The proof of the pudding is that if you look at the number of transactions that are being done in the banking industry three years ago, and today, and how they were being done, you will see that we are finding solutions. Necessity is the mother of all inventions; and we are finding solutions to make sure that our customers are happy. One of the things with the cashless Lagos, and Nigeria that we are pursuing, is that if you can come up with solutions that will solve the problem of availability of cash, and the speed of payment, cash will disappear by itself.
Moving on to your performance, from your first quarter results, I admit that market had been very bearing for a long time, and by the end of this Q2 your shares had dropped 17.6 per cent. You also suffered a decline in your Q1 profit even though your income grew by 27 per cent. Again, your MPLs were at 10.3 per cent as at the end of Q1. In the light of these, what is the bank doing to shore up capital? Also, what is it doing to attract investment at cheaper rate?
From our expectations and what we communicated to the market at the beginning of the year, we are in line with our expectations. The decline was year on year, I believe, but on our expectations, we are in line with our expectations. Don’t forget that our expectations were based on a market that was in recession, so we cannot be doing better than a recessed market. Our business is tied to the economy we are in, and if our customers are suffering then it’s going to affect our earnings. But in line with expectations, I think we exceeded that. When we look at what we are doing, there are two areas that give me confidence that we are on the right track. If you look at our cost profile year on year, our cost had dropped, despite the devaluation of the currency, despite the inflation at 17 per cent, despite the increase in pump prices. It means that our move to digitalise our businesses is paying off, especially as most of our customers are happy, because we are providing them a cost effective way to access our products and services, which is mobile, which is ATM, much more than if they have to come to the branch that is very restrictive.
It means also from a capital and market power (MP) perspective, we are just making sure that we are approaching our capital from two perspectives – capital management, and the capital acquisition. In the capital management side, there were some things we were doing before, which we don’t need to do anymore, because they are no longer in line with our strategy. Even if it is in line with our strategy, but we’ve reached the area we want to reach like branch growth, we cannot grow anymore branches especially as customers are adopting other cost effective ways to drive their businesses.
Our lending is going to be more on the retail side and diversified; lending in smaller chunks to more people, and the capital required there is at 75 per cent as opposed 100 per cent. We are also making sure that we, in line with our waste management framework, ensure we don’t see deterioration in our assets quality. I also think that the adoption of the oncoming International Financial Reporting Standard (IFRS 9) will help banks to be more disciplined especially from a collateral management side. Also, there are many interested parties in Diamond Bank; they like our retail banking story, they like what we have done so far in terms of costumer growth. All these are indicative that the market is still very attractive, especially from a banking perspective when you have only about 30 per cent penetration. From a customer perspective, you have business like the Micro, Small & Medium Enterprises (MSMEs) space that is still untapped from a banking perspective, from a lending perspective and from a transaction perspective.
You kept talking about lending and all that, but there is this very wide gap between interest on savings, and interest on lending. Of course, the lending rate is not helping businesses to grow especially the MSMEs sector you talked about. What is the bank doing in this regards?
If I want to go and borrow money today from a non-bank institution, as a small business I will go and borrow money at 10 per cent per month, and that’s 120 per cent per annum, and I will still do it. Many organisations are still doing that in Nigeria, and their businesses are still thriving. Now for us, we know that, that is not a sustainable venture at all, because it can only pay so much. But then when these people borrow money, they pay back very quickly because of the cost. The kind of money they can borrow is for a short time, it cannot be for growing or expanding their businesses. To lend to those businesses, we must help them reduce their risks profile, because the riskier you are, the more the interest rate, so we help you de-risk.
For us, our value proposition is not just about lending to you; it’s about making sure that you are in a state of readiness so that what I lend to you, your business can pay it, and your business can grow as well.That is why, when we lend to you, first of all, we must give you advisory services so that you can grow your business, and deepen your management capacity. We may also help create awareness for your access to markets, that way, the chances of you generating sales, generating income to reach your obligation and to grow your business are there.
The biggest issue is the differential; I get money at three per cent, I lend at over 20 per cent. But then, I look at very many factors – the first one is, cash reserve ratio is 30 per cent, so for every N100 I take, it’s only N70 that I’m allowed. From that 70, I must put 30 per cent in security. From the money that I have to lend, if you look at the total costs, they are increasing. I say I’m a 24/7 bank in an environment that does not have constant power supply, limited security, the cost of IT is denominated in dollars, not in Naira; and you add all these to the total cost of providing the service, your margins are small. Those margins are reflective; if you look at my returns on assets/investment, it’s just about four per cent.
Digitalisation is supposed to make cost more effective, but management costs are rising, what is Diamond Bank doing to stem this?
When you say management costs are rising, I don’t understand, because when I look at my cost this year, and my cost last year, it has been flat or going down, because dollar went from N180+ to XYZ. About 30 per cent of my cost is dollar, with inflation at 17 per cent, everything has grown by 17 per cent, and fuel pump prices also went up. I even increased the salary of my staff, where reduction of staff was less than 10 per cent, and despite all that my cost was flat, so something must be working. Let me tell you why it worked – two things, first of all the cost of serving costumers went down because we have gone to cost effective areas.The cost of doing our work internally has also dropped because the infrastructure that we have deployed allows us to be pursuing zero paper transactions. By the end of this year, we should be running zero paper transactions except the ones that we have to print paper for, especially regulatory. All these printers and the likes, it’s not about the papers, but the industry around the paper that goes with it. It’s also the speed of doing things as well, and also the cost effective areas. So digitalisation despite the increasing cost profile of the industry, for those who are actually using it right with benefits, costs are actually going down.
Before, when we have our quarterly business reviews, what do we do? We hire a place and everybody flies in from different places, so 60 per cent of the people will spend two nights in a hotel. But two weeks ago, we didn’t stay two nights in a hotel this time. What we did was we told everybody from their own screens we will have conferencing; we did video conferencing of 60 area managers. What we had never done before; we didn’t pay hotel bills, we didn’t buy food, we didn’t have to travel, we decreased the risk, and people went home. Even the quality of life increased. Digital also increases the quality of life; it helps us close the branches early. At six o’clock, we tell everybody to go home, to go take care of their families. That’s what we are doing now.Can you imagine that at six o’clock, 300 branches with the generators go off for two hours? Do the math; digitalisation allows you to do that. Do you know why? From the centre you can switch off; you can see when everybody has closed, and you close and go home.
There is this growing concern about digitalisation because it’s replacing humans with machines. In the past, Diamond Bank was alleged to have sacked about 1000 workers. What is Diamond Bank doing to reassure its workers? And if you’re talking about managing cost, and then investing in infrastructure as opposed to human capital development that is not cost cutting for me?
What digital does is that it helps you fix your cost. It means that as my number of customers is increasing, I don’t have to add more people to the business. The people I have here will be enough for me to grow my business, and I will be fine. Secondly, it means that I’m keeping my talents. I’m in the banking industry, if costs are increased by 17 per cent, if inflation is increased, if pump price has increased, then my people have actually had a price cut. So I have to adjust, because you cannot be telling workers to look after people’s money, and they are hungry. It is prudent to make sure that you have the best people looking after your costumers. How can you give good costumer experience if you are hungry? We know that this can be easily taken care of from the cost cutting. Also, I don’t know where the 1,000 people came from; I think maybe it’s for over three years, which is in line with our normal appraisal when we also hire. You didn’t say how many people were hired, only the bad side. But you know that digitalisation creates more industries and employs more people.
Let me give you a typical example, we have two new products in the digital platform – Beta proposition and Diamond Y’ello, and that’s a new business profile. With Beta proposition we’re sending agents out to market places to open accounts for market women on their phones, and giving them cards. Those agents have about 500,000 customers in that new business line. Those agents are not the normal full-time employees that we are paying lots of money; those are new types of bankers that we have trained. We have created a new area, we are training them, and we employed 1,000 people in that space to go and service our customers in that new economy. These are people we would never have employed before, if we were just doing our normal banking. We know that to open a savings account for different people in different areas, we can’t just use people like top officers, it would be too expensive. So we employed another 2,000 people, making it 3,000 in total in outsource servicing. If you look at agency banking, we’re telling small businesses that, “you know what, we’re doing cash in, cash out services for our customers with the Diamond Y’ello, and we will give you incremental business.” From that we are now giving you another line of business, which means you can employ more people. What digital is doing is creating new opportunities, and it facilitates commerce, which means more business.
Let me give you a typical example, like goods ordering from Dealdey, Jumia, Konga and all that; who is going to deliver all those goods? They have created more employment than you would have ever done from a one shop, because you’ll have to go there. So, digital economy enhances commerce, and commerce enhances consumption, GDP, and more job creation. Like I always say,when we think Amazon, shipping lines are going to increase, do you know why? Because no matter what magic or the kind of innovation we do, goods produced in China must come to Nigeria, and how is it going to come to Nigeria? The more people are ordering goods, the more the shipment. Digitalisation has the most powerful effects on commerce, and that is what we need to see here in Nigeria. Konga is selling more than so many shops put together. Digital is reducing the cost of entry because there are no more barriers. There are people in the agricultural sector that are using technology to enable their businesses. Imagine the group that we sponsored last week; they do makeup.They go to people’s houses and do makeup, and after that they pay you electronically, and what some of them earn in a weekend is amazing.
Diamond Bank is a medium-sized bank, and majority of these medium-sized banks are having challenges with their credit ratio. Diamond Bank in its Q1 report was barely above the regulatory CRR at 15.1 per cent; I know you talked about raising capital, but what are you doing to shore up your capital adequacy?
Raising capital is shoring up capital adequacy. We are looking at things that we don’t need anymore, like some assets that we don’t need anymore.
…Some banks are going Euro bonding, is Diamond Bank going the same way?
There are many ways to raising capital, whether it’s Euro bonding, or getting someone to come and invest in an organisation. We are looking at all the options, and the best option that is good for Diamond Bank in a cost effective way. You know, there are two ways – capital adequacy lightens the weight. Either it is the nominator or the numerator but we are working on both sides. Like I said, there are some assets that we don’t need any more, we’re in advanced discussions with organisations that like Diamond Bank’s story, and want to play a role in it for a long term funding perspective.
Earlier, you talked about the recession, and not being able to run ahead of it, however banks are seen to be reaping huge profits at the expense of the other sectors in the economy. Why is the banking sector the most buoyant? Even if it’s a service industry but they are not the only ones there, and others are not reaping as much profit?
I can only speak for Diamond Bank and not for other banks. I’m in the business of people, and I cannot be doing well if we are in recession. So it goes back to the statement that you made that my figures dropped last year, and I said, yes, because we are in recession. I can’t be projecting more than in line with our budget last year, when we were deep in recession. I can’t be bold to say that last year was a great year. The way things are going, we looked at our customers and knew things were going to be hard so we needed to adjust, else we will start pursuing profit at the expense of our customers’ businesses. We are in a long term gain for our customers; we want them to be growing from us for the next 10 years, and next year, we will have to find new people.
Taking you back to lending, the CBN at its June MPC meeting expressed concern about the credits to the private sector, saying, it’s below the targeted 14.88 per cent. What is Diamond Bank doing for instance to increase lending to the private sector?
I agree, and I think for us in Diamond Bank, we have decided on the niche that we are going to lend to, and that area is one that we have not been paying much attention, which is the retail space. I believe that we are all experts at lending to cooperate and moving businesses, because it’s easier, and we have a high level of information. But what we also trying to do is to build the market for small businesses, build an enabling environment to lend to that space – retail, and agriculture. I think other banks are doing that too. I think there is also saturation at what you can do in a particular level. We now have to go into the retail, the agricultural space to lend, and that’s what we are doing.
We are building capacities and capabilities; we are also trying to create an enabling environment for banks to lend in that space. This enabling environment will require even beyond providing infrastructure, but that the businesses themselves understand their business better, understanding what the requirements are to borrow, and why these requirements are there. These requirements are there not for the convenience of the bank, but also for the sustainability of the business.
For example, sometimes we find out that in some businesses don’t actually have to borrow; they just have to restructure their cash better, and that they don’t have to borrow for a long time. Sometimes, I can lend to a customer with the hope of making money, but then again, one day he will either go and report me to the consumer protection, or the business will go down, because I was not the only one lending to him, so we have to lend responsibly as well. And in lending responsibly, the customers must understand the implication of the lending. In England, their new Code of Conduct says that when you are lending money to someone, he must truly understand the implications. If he does not understand the product, don’t lend to him. He must also sign that he understood. So the onus is on you to prove that. You find that sometimes, you lend to a business, you don’t see where it is going to, and if anything happens in the economy either by one or two margins on the interest rate that business will go.
The MPC was also concerned about the weak macroeconomic environment, and its pressure on the banking system.What is Diamond Bank doing to cushion the effects of this pressure?
What we are trying to do is to diversify. Nigeria is highly concentrated and we’re dependent on oil for foreign exchange, we’re dependent on government for employment, and we’re dependent on a few things for most of our needs. What we are trying to do is to first of all, diversify our business and the best way is through retails. What we are saying in essence is that we are going to diversify our income stream, and it’s going to be dependent on many customers and not a few. We are going to diversify our products stream, we are not even going to rely on one product but various products; because we know that different customers deal with different products in different times of their lives, so we segment their business. We are also building equity in small businesses so that we can provide value added services. We are also looking at collaboration with other industries in the retail space. It’s not just about banking, it’s beyond banking services. We are providing a full bouquet of services that will bring more people into our ecosystem, and not just people who just want banking. We are pursuing share of life and, not share of wallet. Share of wallet means that just when you want to make a payment that’s when you need your bank, no! What we want is that you think of us as your 24hour partner, and to do that I have to collaborate, not just me as a bank; I can’t do it by myself. Who are the people that impact the person’s life? MTN, let me partner with a Telco; food, who are the big people in the business, so that I can create an ecosystem that my customer will say: ok, if I bank with Diamond Bank, it’s not just because it’s a bank, but because they understand me, and they are there at my point of need.
Talking about diversification, the federal government recently launched the Economic Recovery Growth Plan, but it is feared that it has associated risks on the banking sector liquidity. How real are these risks and how wide are they?
For me, I will respond in a very simple general way. When you add a new product, or you go into a new venture, it changes the risk profile of the business. Even in the new mobile banking that I’m telling you we are going into mobile banking, there is a risk to mobile banking. There are new things to learn, new processes and there is cybercrime. But the risk outweighs the risk of the way we were doing business before; so the benefits of going mobile outweigh the risk of using cheques.
But it also introduces a new element of risk.
Again, the associated have not been defined, but I think banks generally, and also the Central Bank have a better risk management framework to be able to anticipate what those potential risks are, and we can put safeguards on them, which is the most important thing. We are in the business of risks; you talked about lending, lending is a risk, because there is a probability that the person will not pay back. By mentioning that probability and pricing that probability, you are making sure that you don’t go overboard, because if I know that there is a 90 per cent probability risk of something failing and I go into it, I’m looking for trouble. If I know there is a probability of 40 per cent risk and I don’t price that risk during a period of time, I will lose capital. For us, it’s dimensioning those associated risks and putting safeguards in place. If there is a national recovery plan that should reduce the liquidity risks, because the idea of national recovery plan is to make sure that there is liquidity in the system, and the biggest provider of liquidity in the economy are the banks.
Finally, the Naira has not yet found its footing in the foreign exchange market despite the CBN interventions. Why is that, and in particular, why is it so difficult to get dollar from the banks?
I’ll say it again; I think we are hard on ourselves. If you look at where we were this time last year, where the Naira was, there was no availability and money was not coming in. Today, we are under N400. People will say PTA, and when they come to Diamond Bank, they get. Secondly, money is coming in to Nigeria now.
…But those who need it most like the industrial sector, who need it to import tools, are not getting it?
If money is coming in, it depends on what price they want it at? We are not selling to the BDCs; it’s going through the banks. If someone comes to me and said: I’m a manufacturer, and I want dollar at N300, then there is none! They (industrialists) are being unrealistic and funny, because when they price their finished goods, it’s at market rate. Let us be real in this market, instead of opening letters of credit (LCs) for 20 or more, open for two first, and you’ll get it at the prevailing price. There is money; if you come and say you want PTA at N300, I will say go and look for a BDC to give you. Right now, Central Bank gives to me at N368, and I give to you at N369, as they said, very transparent.
On the flip side, there are so much unfit and filthy notes in circulation, even coming from the ATMs despite the CBN’s regulation on this. What is your bank doing about this?
I think this will facilitate quicker migration to a cashless system. Again, if they can go through an ATM, that means they are fit. You said that for some of them you can barely touch them but that’s what we have. The ATM notes are the true tests, because if they are actually unfit they can’t go through an ATM machine, but get crumbled. So, we encourage everyone to use mobile.