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Otti - Diamond Bank Has Created a Model for SME Financing [interview](AllAfrica Via Acquire Media NewsEdge) Diamond Bank Plc is widely regarded as a top pick among the Tier II banks in the country, beating industry averages in most of the performance indicators. Over the past few years, the bank has created a niche for itself as a friend of small medium-sized business owners on the account of the way it has bolstered the sector through innovative financing. The bank's Group Managing Director/Chief Executive Officer, Mr. Alex Otti shares the bank's success story with Ayo Arowolo and Obinna Chima. Excerpts: A number of research reports we have read have positive comments about the performance of Diamond Bank over the past three years with one even describing it as a 'rising star' among the Tier II banks. Could you let us have a peep into the journey to this position? Yes, you are right. Some of the things that have happened in Diamond Bank didn't just happen; people caused them to happen. So the first credit goes to the people in Diamond Bank. I sometimes pride myself as a very lucky CEO by having the best set of people in the industry to work with. Also, together with my team, we have created a very conducive environment for people to thrive and there is a lot of fresh air in the system. The system is very open and transparent and we are able to challenge our people to come up with their best. You will be amazed where the best idea comes from. Not necessarily at the executive management floor, not at the boardroom. It might even be the person you could have ignored because he probably is at the lower end of the ladder, may be the person with the best idea. So I give a chunk of the credit to the Diamond Bank people. We also have a very supportive board. We have a board that is very business-friendly and so a lot of time, approvals that may ordinary take days or weeks, we get them turned around faster. When you have that kind of board, it makes life easier and makes work faster. Today, we are one of the most efficient banks in terms of service delivery, in terms of the ratios and alternative delivery channels. You might have heard of our mobile money application, it is reputed to be the best in the industry today. We just keep thinking, our people are innovative, sometimes when they have a brainwave, they will sit down and translate it into products for customers to make life easier for them. We started in 2011 when I joined with a strategy of taking input from people. We started by sitting down and asking ourselves who exactly we were, where we wanted to go and how we wanted to get there. There is a saying that most times when people fail, it is not because they planned to fail, but because they failed to plan. So the plan was most important and we all sat down for several days and eventually crafted out a strategy for the bank and we defined a short-term, a medium-term and long-term strategy and we got the board to approve it before we went into the execution stage, which is usually the most difficult stage. A lot of times, people are very tall on ideas, but are very short on implementation. So for us, we thought we should be as tall on implementation as we were on ideas. So we went into execution with a single-mindedness and today, we are where we are. As at the end of 2011, the bank posted a loss before tax of over N27 billion and that was after having written down about N44 billion in bad loans and also taking a loss of around N12 billion after selling about three of its subsidiaries. This was also after selling over N65 billion of bad loans to the Asset Management Corporation of Nigeria (AMCON). We thought it was imperative that we should start on a journey on a clean slate by providing for all the challenging risk assets. So the next year, we posted a profit before tax of N28.5 billion, the next year being 2013, we had moved up to N33.5 billion and in the half-year of 2014, even in the face of a very stiff regulatory environment, we have posted close to N19 billion profit before tax. So the summary is that it is a combination of a lot of factors - the people, the strategy, the board, execution, innovation, and people thinking on their feet, as well as openness, and transparency. Just galvanising all those together is where we are. You have some independent directors among your board members. Has the concept made any significant impact on the success of the bank? Having independent directors is now a requirement of the Central Bank of Nigeria (CBN). It is compulsory for every bank in Nigeria to have independent directors. Some have one, but we have two. The whole idea is to have one or two people with a fresh pair of glasses, looking at the bank from a different perspective, because they are not conflicted in any way. They are not shareholders, they are not contractors, and they may be customers, but not major customers. They look at the bank from a different perspective and they want things to be done properly, they want corporate governance to be upheld, they want the bank to leave behind legacies that are enduring. That has helped and we have very smart people. One of them is Ifueko Omoigui Okauru, who used to be the Federal Inland Revenue Service (FIRS) chairman. We all recall how she ran that organisation and how she transformed it. We are lucky to have her on the board. She is one of the best people to have. We also have Mr. Ian Greenstreet who used to be an investment banker out of the United Kingdom. He is a Ghanaian by birth. He also brings a very strong perspective to the board. So it is something that we recommend for every bank. As many independent directors that you can have would add value to the quality of decisions that are made at the board level. While most banks shy away from giving loans to SMEs, your bank seems to be doing very well in that area. Is there something you are seeing that other banks are not seeing and what is your strategy? This is a very interesting question. Sometimes, it is important that you sit back by defining who you are and who you want to be. You need to sit back and look at theories and try and see if they are consistent with realities. Bookmakers would say that is the area where you have the largest non-performing loans (NPLs). But there is a whole lot of other things that they don't tell you. The chances that the very small disparate loans that you have created will all go bad at the same time are very slim. So that is theoretically speaking. As such, if I booked a N500 million loan for a distributor of a brewery and my security are the bottles and cartons of beer and all that, the day you will walk into a warehouse and see a warehouse filled with cartons, there would be nothing to indicate whether they is liquid content in those cartons or not. If you begin to check them, I am sure that if you are checking 500,000 cartons, I am sure you will probably not be able to do so. I am saying this because I have an experience where in my previous job, I had disbursed loans to a distributor and the day he stopped paying, we made an attempt to check if he actually had the stock and we found out that they were empty cartons. That was N500 million down the drain. Now, if you lend that N500 million, for the purpose of this discussion, to about 1,000 customers and they are smaller, the chances that you would loose N500 million is very slim. Even if 10 per cent of them do not pay, that would just be N50 million, out of N500 million. So in terms of the number of NPLs, some of us who have implemented it have said that is not true and because you are dealing with small diversified loans, you will also find that it is easier to pay them back. Experience has also shown that a lot of ordinary people pay back their loans, except if they are hit by bad weather. We have situations where the so called big men would borrow, refuse to pay and wait for you in court because they have the money to hire lawyers and they are also the ones that know the technicalities of the law and would use them against you, even when you have collateral. By the time you plan to dispose of the collateral, you have a court injunction and may remain in court for 10 years and then somebody would wake up and say you should negotiate and settle the matter out of court. That is our experience. Yes, we have well over a N100 billion out there, the loss numbers may be higher than the corporate segment, but smaller than the middle market. The point to note is that in terms of margins, we are able to go home with a little bit more margins than we would have in the corporate space. So I think what is important is not necessarily the percentage of NPLs, but are you able to cover that risk from the pricing? Essentially, it requires some modelling. So if I am lending, for the purpose of this discussion, at 11 per cent, and I am losing three per cent, and in another sector, I am lending at about eight per cent and losing six per cent, by the time you do the calculation, you will find out that you are much more likely to lose more money in that big segment. That is just a way of breaking it down. For us as a bank, we took a principled stand that if we do not support entrepreneurs who have ideas, as a Nigerian bank, it would be difficult to expect anybody to do so. We have a responsibility as a Nigerian company to support our people by doing things that would generate employment and keep a lot of our people out of unemployment. If you look at statistics, you will find out that in China, about 95 per cent of businesses are categorised as SMEs. In India, it is even up to 99 per cent, in the US, it is about 88.5 per cent. How many people can MTN, Shell, Chevron or even Diamond Bank employ, just a small per cent. So the only way to help the system is to help people to employ themselves, help that person making pure water, candles somewhere and the man will no longer be looking for jobs. He may not be a billionaire, but at least, he will be able to take care of his family and provide the basic needs. From that point of view, Diamond Bank is happier meeting these needs and also encouraging our people to translate the ideas they have into products. We even go beyond the funding to also supporting them. We have what is called Building Entrepreneurs Today (BET), where we select a few people who have good ideas, in partnership with the Lagos Business School, lock them up in a classroom where professors would teach them a few things that a lot of people would not know even when they have the ideas. Then we have them compete at the end of several weeks and the best five or ten get grants of between N3 million and N10 million from the bank to set up businesses. So those are the kind of things I am very proud and happy to be associated with, not necessarily the money in the bank, but the impact that we are making in the society is even more important to us. The interest income component of earnings for banks is being restricted and most banks often depend on interest income. What is your strategy for diversifying your earnings base? That is actually one of the major things that keep any bank CEO up at night, because you want to diversify your income base so that you won't be reliant on a particular line which may disappear tomorrow. The cash reserve ratio (CRR) used to be six per cent, it was moved up to 12 per cent, for public sector CRR, it was moved from 12 per cent to 50 per cent, and from 50 per cent to 75 per cent and what that simply means is that any money that you raise from the public sector, 75 per cent of it is sterilised at the central bank at zero per cent interest rate. It is the same thing for private sector CRR that was also moved up from 12 per cent to 15 per cent. These are game changers for everybody. Accordingly, for us as an innovative and thinking bank, we are always thinking of ways to defend our margins. One of the ways we do that is by adding value. If you look at our cost structure, you will find out that it is a bit moderate and it has been like that over a period of time. The reason is simple: it is because we add value. Even though we do some of the things we do to provide convenience for the customers, it pays back by virtue of the fact that people are happier to do transactions with you. If you read the current KPMG Nigerian Banking Industry Customer Survey, you will find that Diamond Bank which used to be number six or number eight has today become number two in most areas. That is the way to ensure that you not only maintain a hold on your customers, but also expand your customer base. As margins begin to thin out, then logic simply tells you that the only way to grow is by volume and how are we doing that? Today, it is said that there is over 46 to 47 per cent of the population that are either unbanked or under banked. So for us, we have started pushing the frontiers of financial inclusion by bringing banking closer to the people who ordinarily would not have any business to do with the bank. We are rolling out products. The first one we rolled out is called the Beta banking product and we were shocked at the kind of response we got in the first few weeks when we started the pilot last year. Today we have rolled out and it is such an interesting product. What we do is just a cash-in, cash-out. We have an agent that walks into a shop, collects your money and when you need money, you call them and they bring it to you. It is such an incredible product and people are clamouring for it. People ordinarily don't like going to the bank, forget about those big edifices we are building, a lot of people want you to bring services close to them. That is why if you have mobile phone today, you can have an account and you can do transactions from the comfort of your home or office. These are the areas that we are pushing to reduce our reliance on interest income, earned fees and we are very efficient in terms of trade. We have a subsidiary in the UK which helps us to ensure that our transactions are done in very seamless ways. We also observe that Diamond Bank ranks high in terms of staff efficiency, what is the trick and how do you measure performance? It is a very important measurement index for us and that is profitability per staff. So for us, we are not afraid to bring in more people once everybody is doing what they are supposed to do. Where you have a problem is when average productivity of staff begins to go down. It is something we measure on a month-to-month basis. So on the number you reeled out could not have happened if we were not paying attention to the average productivity per staff. We have a state of the art academy called the Diamond Academy, headed by somebody you will call a vice-chancellor. If you are joining Diamond Bank for the first time and if you are a green horn and you don't have banking experience, you don't count yourself as a staff until you have gone though our 10 weeks training academy. The last time I checked, in the last two years, we had brought in close to 2,000 people, fresh graduates. We take them through training and within the 10 weeks, we pay and feed them and by the time we finish with the training, we send them to the branches for branch attachment and that takes between six to eight weeks and when they have done well, they come to see me. That is one major area. We measure people because you know whatever doesn't get measured, doesn't get done. Like it is said, the fish gets rotten from the head, so the management of the bank participates, from me down to others, we also work and they all see that we are busy working. So I think we have created the right environment for productivity per staff to continue to go up. What will be the revenue impact of the recently concluded rights issue on the bank and are we expecting further branch expansion from Diamond Bank? I might not be able to give numbers as per revenue impact because you know what we are talking about is Tier I equity, so it is not like subordinated capital that has a tenor. The rights issue goes into tier-1 capital. The most important impact that we expect that it would make on the bank is to increase our capital adequacy ratio (CAR), which has been hovering around 17 per cent to anywhere above 20 per cent. Today, we are one of the eight systemically important banks (SIBs) as categorised by the Central Bank of Nigeria and the implementation of the Basel II and III Accords from October would require that banks like ours that are not just international, requiring a minimum of 15 per cent CAR, but also an SIB, with an additional 100 basis points headroom, meaning a minimum CAR of 16 per cent. We would have to work very hard to maintain those limits if we would remain an SIB. That is one of the major impacts. The other one is to make funds available for trade and business. The numbers are not yet out, but the indications we are getting from the parties to the offer is that the rights issue was fully 100 per cent subscribed, which is also a vote of confidence on the board and management of the bank. These days when the market is still wobbly, so it is a feat to go into the market and you see everything that you put out in the market being mopped up by existing shareholders. In terms of the question on branch expansion, we would continue to expand. We believe that a number around 300 in terms of footprint would be somewhere about the optimum number. As we go into 2016, we would probably be looking at a number of about 350. As at the last count, we had 264 at the end of August and I believe that we would be able to add nothing less than another 36 branches before the end of the year to take us to the ideal number of 300. What earns you the very hot seat of the bank's CEO? The seat is not hot (he bursts into laughter). I think the most important factor here is God. I believe strongly in the power of God and I believe that he makes kings and he removes them. There are also people who have ascended thrones and did not achieve anything. Besides, I also think that the training that I have had over the years helped in shaping the decision of the board to bring me here at the time they did. I know that there were about 10 of us they were considering at the time they started in 2010 and the number kept reducing until there was just one man standing. I am sure that with benefit of hindsight, they would say it was a good decision. Copyright This Day. Distributed by AllAfrica Global Media (allAfrica.com). |