Agenda Setting: JPMorgan Can Be a Lot More Than a Merchant Bank in Nigeria
Before the news broke that JPMorgan Chase was planning a merchant banking operations in Nigeria, Dapo Olagunju may not have been a very familiar name in the Nigerian country’s financial ecosystem. JPMorgan is the largest investment bank in the world but with a very small footprint in the Nigerian market. Olagunju was only running its representative office in Lagos.
Immediately the news of his bank’s application to the Central Bank of Nigeria (CBN) became public, Olagunju turned a rainmaker with tabloid celebrity profiles. His CV is now an official Gazette. For a country badly in search of capital and markets, the entry of the world’s number one purveyor of investment represents a lot more than money. It is an endorsement; it is an opportunity. It brings Nigeria closer to the American dream.
At some point during his campaign in 2024, then candidate Donald Trump had even mooted the idea of appointing Jamie Dimon, JPMorgan’s CEO, the Treasury Secretary of the United States. Though Trump won, it was Scott Bensent, a hedge fund giant, that was appointed to manage the US treasury.
The American market is the most coveted in the world and that gives whoever occupies the White House an enormous economic heft. At a size of over $30 trillion, it is bigger than the next three biggest economies combined.
This should make the coming of its biggest investment bank into a low-profile economy like Nigeria (by global standard) an exciting news. With an estimated population of 230 million people, a gross domestic product (GDP) of less than $400 billion and a per capita income of about $1,600, Nigeria needs an almost unmatched level of investment to meet the critical needs of its people across all levels. From power, agriculture, solid minerals to energy, years of under investment have created needs that cannot easily be filled.
According to the Federal Government, the country needs over $100 billion in the next 10 years to achieve regular supply of power. Several studies have been commissioned to determine what would come close to a reasonable investment in agricultural investment for Nigeria to attain food security. Very few research papers have provided conclusions that can be adequately relied upon, suggesting that it is so vast true that estimates will be hard to determine.
Nigeria has people it cannot conveniently feed, sufficiently provide electricity for and reasonably house. Finance is a major impediment. The Nigerian financial market is shallow, short term and too illiquid to make a difference.
Let’s start with shallowness. The capital market where long-term finance is raised anchors its strength around the Nigerian Exchange Group (NGX), its only stock exchange. Of the 20 million or so businesses that are registered one way or the other, only about 155 are listed. South Africa has over 400 listed companies. The United States and the United Kingdom have over 4,000 and 2,000 respectively. Even only about half of the listed stocks in Nigeria are traded at least once in a month. The NGX equity market capitalization, value of its listed equities, is just about $127 billion compared to over $1.53 trillion in South Africa, $4.3 trillion in the United Kingdom and about $70 trillion in the United States.
Secondly, many business transactions in Nigeria are financed by commercial banks who are essentially wired for only short-term transactions. Over 80% of funds on their balance sheets sit for less than 90 days. The commercial paper market which has been renascent in recent days with the introduction of the FMDQ platform only exists mostly for a maximum of 365 days. That majority of economic activities in a country are financed by short-term instruments, including government borrowings, speaks to the high level of risk perception of the country and the negative perspective of investors. That economy can only be built as a throughput platform for trades in goods produced from other countries.
Thirdly, market float is still low particularly among companies with indigenous promoters with most of them holding tight to their super majority control. Aliko Dangote and Abdulsamad Rabiu, the two richest Nigerians with big companies floated on the local stock exchange, do not have less than 70% shareholding in those respective companies. A liquid capital market is critical to market discovery and confidence. Listing just for a presence on the Forbes list still makes the indigenous public companies more of wealth showrooms rather than retail investing instruments.
No institution is better placed to support market development than the biggest investment bank from the biggest economy in the world. Granted, JPMorgan will be in Nigeria to make profit as a business. Granted also that the job of economic development is mostly that of the government and its agencies. But a promising economy with vast potential like Nigeria offers an immense opportunity for a bank with the balance sheet like JPMorgan to make a difference and leave a legacy.
One area where there has been a serious gap is underwriting, which has virtually disappeared or become rare in the Nigerian capital market. Underwriting, which commits the issuing house to undertaking to pick the unsubscribed part of an offer, naturally strengthens investors’ confidence. With its more than $4 trillion balance sheet, JPMorgan commands the biggest underwriting portfolio in the world with over 8% share.
As a merchant and investment bank, JPMorgan will also be working closely with the NGX and Nigerian Securities and Exchange Commission (SEC). Supporting long-term capital formation will be crucial to what ultimately counts as success. The NGX and SEC will need to work with international investment banks and other financial institutions if they are both to achieve the target of $1 trillion market capitalization they have set for themselves in the newly unveiled Capital Market Masterplan.
Trade finance may also be where JPMorgan will make a difference. Many viable transactions have gone fallow as a result of limited availability of trade finance instruments such as Bank Guarantees (BGs) and Stand-by Letters of Credit (SBLCs). Nigerian companies often struggle with credibility and trust with their foreign counterparts, particularly western ones when trade deals are on the table. Oftentimes, guarantees and SBLCs are required and many times, foreign companies reject the ones issued by Nigerian banks except if they have correspondent banks willing to step in. Getting BGs has usually been a nightmare for genuine businesses and has capsized trillions of naira of credible trade deals.
Then there is the issue of capacity. Locally, some banks have big balance sheets. When you convert those balance sheets into dollars, they hardly stand up to the total assets of a state-wide bank in the United States or a provincial bank in the United Kingdom. Supporting a big-ticket transaction of up to say $50 million could be an issue. The working capital of a typical medium-size cocoa processing plant may be as much. In situations like this, the “fortress” balance sheet of Jamie Dimon may be of help.
Finally, export facilitation. The American market is gold for anyone that has access. Apart from the country’s President, every businessperson on the planet knows this for sure. It is the only with size and depth; almost 340 million people with an annual average income of over $80,000. India and China have more people, not people with this kind of money. Population, as they say, sometimes is not market. That is why the word “tariff” from the White House these days sends panic around the world and roils the market.
As America becomes a lot more distrustful of China and India, Africa provides the next frontier for trade collaboration due to affordable labour and a vast pool of raw materials. JPMorgan can open the windows wider with its presence in Nigeria. Nigeria exports only about $3 billion worth of trade to the United States, a rounding error in the US current account balance. South Africa exports over $8 billion and China over $420 billion.
US companies, though massive in size, play at the fringes of the Nigerian market. They only have digital or representative presence in the country, perhaps because the country (Nigeria) is too small in economic terms to be meaningful. But size is sometimes different from potential. The breath and size of Dangote Refineries and its recently concluded IPO shows what is possible. Many of those refineries, oil mills, gas pipelines, windfarms and entertainment parks are possible if only the right financial institutions will see them early enough. MTN clearly saw what Vodafone refused to see 25 years ago. Today, its executives pop champagne in Johannesburg at the end of every financial year. May Jamie Dimon and its team will be doing the same by 2050 (if he is still around) in New York.
