Nigeria’s population remains insurance-shy – the sector accounts for only 0.5% of GDP – but increased awareness and an emerging middle class are opening up the industry.

ECONOMIC growth and per capita income in Nigeria have doubled in the last five years, and look set to continue to rise rapidly. A comprehensive program of reform adopted over the past four years has set Africa’s most populous nation, and one of its biggest oil and gas producers, on the path to becoming one of the top twenty economies in the world by the year 2020.

The governments of Olusegun Obasanjo and his successor, President Umaru Yar’Adua, have focused on macroeconomic stability and fiscal stabilization, and on making the country more investor-friendly. Steps have been taken to create a sound and healthy financial system with the capacity not only to achieve sustainable economic development for Nigeria itself, but also, in the longer term, to make Nigeria the financial hub of Africa.

Enforced recapitalization of first the banking sector and, more recently, the insurance industry has led to the emergence of leaner and stronger financial institutions following a process of consolidation through mergers and acquisitions.

The aim of reform has been to increase the size, improve the efficiency and raise the diversity of the sector. Nigeria faces important challenges, including establishing vital infrastructure, such as power, transport and water, and strengthening its business environment. For this it needs an effective financial system to spur economic growth through the mobilization of financial resources and financial intermediation.

As a result of the implementation of higher minimum-capitalization requirements by the Central Bank of Nigeria, the banking sector has been transformed. Indeed, it is now one of the fastest growing in the world, and Nigerian banks are ranked on the list of the world’s top 1000 banks.

The 89 banks that crowded the sector four years ago – many of them with a capital base of less than $10 million – have been cut down to 24 well-capitalized institutions, almost half with an equity base of more than $1 billion, and many of which count major international financial institutions among their shareholders.

“We now have banking institutions that are well positioned to take advantage of globalization, operating with branches in major financial capitals of the world,” says Remi Babalola, Minister of State for Finance.

Nigerian banks have become avenues for the inflow of foreign investments into the country, sourcing equity from abroad. “Given their significant capital bases, they can tap into global financial markets, enabling them to partake in big-ticket transactions in infrastructural development, energy, communications, construction, and the hospitality business,” the minister adds.

The banks now account for approximately 65 percent of total market capitalization and 70 percent of market value. Financial size has become a key competitive factor, and they have been scaling up, accessing fresh funds from local and international markets through public offerings, issues of eurobonds, shares on the London Stock Exchange, and global depository receipts (GDRs).

Twelve of the 24 banks sought additional resources from the stock market last year, raising more than $10 billion. Almost all saw their shares oversubscribed, in some cases massively so.

With huge funds at their disposal, the banks have expanded their branch networks and invested in the latest technology, taking banking in Nigeria to a new level. In local currency terms, total assets, total loans and total deposits went up by 58, 96 and 60 percent, respectively, last year. Loan/deposit, loan/asset and loan/GDP ratios all rose.

‘We now have banking institutions that are well positioned to take advantage of globalization’

The banks have surged into the economies of other West African countries, notably Ghana and Liberia. Chukwuma Soludo, Governor of the Central Bank of Nigeria, and chief architect of the banking reform, says expansion into other countries is a viable way for the banks to manage their huge capital inflow. Looking to the long term, he says, “We want to make Nigeria the financial hub of Africa in 2020.” And he adds, “We will achieve it.”

The insurance industry has been similarly rejuvenated. Here too, the era of small, often underfunded and unstable firms is over. Recapitalization and consolidation have left the sector with 49 companies equipped with enhanced underwriting and risk-retention capacities. Average capitalization has risen from 300 million naira to 5 billion naira ($42.5 million).

Public awareness and market penetration are still relatively low; the industry currently contributes just 0.5 percent of Nigeria’s gross domestic product, while in South Africa, by comparison, it contributes 15 percent of GDP. But that only serves to demonstrate the huge potential for expansion, especially given the rapid pace of economic development and the emergence of a Nigerian middle class.

Babalola says new business worth 25 billion naira ($212 million) a year could be generated by enforcement of insurance cover for buildings, fire, and public liability. The government recently ordered ministries, departments, and agencies to insure all government assets, properties, and buildings under construction, as well as public buildings. “We as a government must help the insurance industry, we must now ensure that insurance becomes a key provision in our budgeting process at federal, state, and local levels.”

Furthermore, it has been estimated that by 2010, thanks to the local content law brought in by the government, Nigerian companies could retain as much as 70 percent of insurance business in the oil and gas sector – once they acquire sufficient capacity to take it on. Like the banks before them, the insurance companies have been looking to the markets for extra funds.