Strategic Cost Management A challenge for Nigerian financial institutions
Current Realities ;The fallout of the banking crisis in Nigeria as well as the impact of regulatory changes is prompting a crucial rethink of strategies, operating models and cost structures of Nigerian Financial Institutions (FIs). Recent reforms in the financial services landscape following the crisis have however contributed to declining income margins and increased operating costs. Some of these reforms include:
- Gradual phasing out of COT charges.
- Minimum requirement of a 3% interest rate on savings accounts.
- Harmonisation of reserve requirements on public and private sector deposits by increasing private sector deposits to 31% (up from 20%) and reducing public sector deposits to 31% (down from 75%)1 .
- Limit to the purchase of dollars in the interbank market aimed at preventing speculative trading and saving the declining foreign reserves.
- Increase in the Asset Management Corporation of Nigeria (AMCON) Resolution Costs levy from 0.3% to 0.5% of total assets2.
- Exclusion of particular reserves from the computation of regulatory capital and the limitation of Tier 2 capital (including OCI Reserves) to 33.33% of total Tier 1 capital3 .
Prior to the banking crisis, Nigerian Banks benefited from significant revenue growth accompanying the ‘post consolidation’ era. Cost reduction measures were merely focused on swift solutions that did not address ingrained operating model inefficiencies. Following the crisis, Banks struggled with high operating costs, declining revenue growth and a comparatively high Cost to Income Ratio.
Few banks have been able to effectively manage this issue with average Cost to Income ratio for the Systemically Important Banks (SIBs) being as high as 65% in 2014. This is relatively higher than ratios recorded in other emerging markets such as the BRICS: Brazil – 43%, Russia – 69%, India – 45%, China – 31% and South Africa – 55%.
Other Financial Institutions face similar challenges. Revenue growth for insurance companies is threatened by low penetration (less than 2%) amongst Nigerians, limited product innovation and public awareness. Capital Market Operators also have to grapple with the new minimum capital requirements released in December 2013.
These trends have ultimately resulted in more aggressive focus on revenue growth, which is typically accompanied by significant cost investment and deferred Return on Investment. The ability to grow revenues while maintaining a tight rein on attendant costs is vital to delivering top-tier returns in the current market environment. In response to the highly regulated and competitive business environment, Financial Institutions have resorted to cost management as one of the few directly controllable and manageable profit drivers. While traditional methods such as a reduction in headcount and outsourcing non-core capabilities brings short term reprieve, this may not necessarily be the answer.
Financial Institutions need to take a long term and strategic approach to cost management and implement significant and sustainable cost restructuring initiatives.