AfCFTA, Border Closure and Food Inflation
The AfCFTA (African Continental Free Trade Area) agreement aims to create a continental free trade area for goods and services in Africa. Durggh. It is expected to liberalise and facilitate the free movement of people, investments and businesses across the continent. This way, the rate of intra-African trade (currently at 16 to 17 percent) will increase to 52 per cent. The agreement was signed by some countries in Kigali, Rwanda, on 21st March 2018. Today, it is the largest trade agreement since the creation of the World Trade Organisation (WTO) in 1994. It will create a continental trade bloc of 1.3 billion people with a combined GDP of $3.4 trillion. It aims to attract $4 trillion in investments and consumer spending. It has the potential to lift 30 million people out of extreme poverty. How does it work? The agreement instructs state parties (countries that signed it) to treat products imported from other state parties the same way they would treat domestic products. Golden rule eh. State parties are expected to gradually eliminate import duties and charges. Concerning services, state parties are also to eliminate measures that restrict foreign (as in, African) service transactions, employment of Africans and participation of African businesses within their jurisdiction. Problem! Another problem! On paper, the AfCFTA has great prospects right? Well, it was all going great until 2020. Predictably, the potential of AfCFTA was largely undermined by the COVID-19 pandemic. You cannot integrate economies when countries are closing borders, banning travel and so on, in order to contain a pandemic. Therefore, trading under the AfCFTA, which was due to commence on 1st July 2020, was postponed to 1st January 2021. On 1st January, it was new year, new Africa. AfCFTA and Nigeria At first, Nigerian manufacturers feared the AfCFTA. Due to internal inefficiencies, enterprises feared that they would not be able to take advantage of the agreement or compete with an influx of new competitors from other countries. These concerns sparked opposition so Nigeria hesitated with the signing and ratification of the agreement. Nigeria eventually signed on July 7, 2019. Later, on 11th November, we ratified our membership, ahead of the December 5 deadline. Yet, for AfCFTA to achieve its full potential, favorable policies and trade facilitation measures have to be put in place by individual countries. With international agreements, African countries have non-conformity issues. The national policies of many countries often conflict with the goals of regional trade integration. You already know. This is Nigeria’s sub. We were the first to default when it suddenly closed its borders. Nigeria’s border closure In August 2019, Nigeria closed the Nigeria-Benin border. Our government claimed that smuggling was undermining our industrialisation efforts, and it may have been right. It also claimed that the borders were closed to curb the smuggling of hard drugs, arms and agricultural products. Unsure about this part. Regardless, the closure contravened our commitments under the Economic Community of West African States (ECOWAS) and raised concerns about the plausibility of the AfCFTA. Well, within Nigeria, the result of this closure was tragic. Weeks ago, we explained how food prices have soared, reaching an all time high of 18.3%. Also, food inflation in the country reached a three-year high of 14.9%, according to the National Bureau of Statistics (NBS). The Minister of Finance, Zainab Ahmed, confirmed that the closure of Nigeria’s land borders contributed to this rising inflation. According to GDP data released by the National Bureau of Statistics for the third quarter of 2020, Nigeria fell into its second recession in five years. Open sesame! On 16th December, the presidency finally directed the opening of four land broders: Seme, Illela, Maigatari and Mfun. Last Tuesday however, the federal government emphasized the ban on rice importation into Nigeria. In December, Buhari had directed that the CBN “must not give money to import food. Already, about seven states are producing all the rice we need. We must eat what we produce.” Well, this reasoning is somewhat questionable. The issue is that Nigeria is heavily reliant on imports to feed our booming population of 200 million people. Meanwhile, our production capacity remains inadequate to meet food and raw material demands. We still need to import and trade. What happens next? The AfCFTA is here to stay! It can consolidate Nigeria’s economic growth in many ways. Interaction at our borders will reverse the decline of the trade sector, one of the largest employers of labour in the country. Of course, the AfCFTA would improve employment rates of Nigeria’s large working population. In addition, Nigeria is blessed with natural resources for manufacturing and exportation. If our government increases investments in the manufacturing sector, the nation will produce goods locally and trade actively internationally. This way, the sector can significantly increase revenues. What the country must now do is ensure that our exports surpass our imports, so that we encourage the local market instead of suffocating it. How can we do this? Perhaps it is time to improve infrastructure and enforce policies that would reduce local cost of production.
Policy Round Up: The Federal Government and MSMEs
Again, the Youth Empowerment Fund In November, the federal government earmarked a N75 billion youth empowerment fund. The Minister of Youths and Sports Development, Sunday Dare, explained that the fund is billed to cater for youths within the age bracket of 18 and 35. According to him, the fund “is meant to create a special window for accessing credit facilities and financing on the part of our youths that will help to fund their ideas, innovations and also support their enterprise.” He also stated that his Ministry would work with the Ministry of Finance, Budget and National Planning and the Central Bank of Nigeria to facilitate youths’ access to the fund and thereby meet its set objectives. Subsequently, the CBN (Central Bank of Nigeria) revealed the implementation framework for this fund – the “Nigerian Youth Investment Fund” (N-YIF). Beneficiaries and registered businesses are to be determined based on the nature of projects and subject to a maximum of N250,000 and N3 million respectively. The FG’s intervention will be for a maximum of 5 years, depending on the nature of the businesses and the assets acquired. An interest rate of not more than 5% will be charged annually. When we considered this as news, we noted important questions as to the plausibility of the funding, its scope, assessment of beneficiaries, tracking of outcomes and so on. Covid-19 and fall in oil prices have taken their toll on Africa’s most populous nation. With Nigeria slipping into recession and food inflation skyrocketing, social and economic policies have never been this momentous. Before and after the youth empowerment fund, the Nigerian government introduced many other social programmes that target Micro, Small Medium Enterprises (MSMEs). We would now like to inform you about a few recent efforts. That’s the objective today. Welcome. Funding registration On Thursday, 10th December, the Federal Government disclosed that it is funding the registration for 250,000 Micro, Small Medium Enterprises (MSME). These businesses will be registered at zero cost, under the FG’s Economic Sustainability Plan (ESP). The disclosure was made by the Minister of Trade and Investment, Niyi Adebayo via the government’s Twitter handle. The Economic Sustainability Plan was formulated to drive the implementation of various support schemes for small businesses. A 10-man steering committee was inaugurated in August with members from both the public and private sectors. Survival fund In July, the Federal Government announced plans to disburse a N2.3 trillion stimulus package. It was titled the Nigerian Economic Sustainability Plan, and the purpose is to keep MSMEs afloat amid the economic challenges caused by the pandemic. The core of the program is a N75 billion Micro, Small and Medium Enterprises (MSME) Survival Fund and Support Initiative. This initiative includes a N60 billion MSMEs Survival Fund and N15 billion Guaranteed Offtake. The goal of the MSMEs Survival Fund is to support vulnerable micro and small enterprises in meeting their payroll obligations and ultimately safeguarding jobs. Through this Fund, the FG intends to save at least 1.3 million jobs and impact over 35,000 persons per state. Only MSMEs who have between 10 to 50 staff are qualified for the fund. Eligible enterprises will have their staff salary paid directly from the fund for 3 months. Meanwhile, the Guaranteed Offtake Stimulus Scheme is expected to boost the production capacities of small businesses in order to protect them from the economic disruptions of the Covid-19 pandemic. In September, the FG released guidelines to access the schemes. Registration was opened to every sector, one after the other. Subsequently, the Ministry of Industry, Trade and Investment disclosed that a total of 174,574 persons successfully registered for both schemes within 48 hours. In October, 70,000 businesses were shortlisted from the 432,000 Nigerian businesses that applied for the payroll support. Subsequently, on 19th November, the Presidency announced that 101,567 beneficiaries, drawn from 16,253 businesses had received their first monthly payment from the program. The information was disclosed via the official Twitter handle of the President. Special grant to rural women The Grant for Rural Women was introduced as part of the President’s social inclusion and poverty reduction agenda. It is a part of the National Social Investment Programme, with a target of lifting 100 million Nigerians out of poverty in 10 years. Way to go! The grant was introduced by the Federal Ministry of Humanitarian Affairs, Disaster Management and Social Development and it involves a one-off grant to some of the poorest women in rural Nigeria. Through this grant, 700,000 women are to be empowered with N20,000 each. The grants were launched in Plateau state and subsequently disbursed in Ondo state. In November, they went to women in rural areas of Gombe state. The Ministry disclosed this via Twitter. The Minister, Ms. Sadiya Umar Faroq, urged the women to use the grant to improve the lives of their families. No kidding. Conclusion Many other efforts are worthy of mention. In November, the Development Bank of Nigeria disclosed that it had disbursed over N150 billion since 2017, impacting MSMEs. The Twitter account of the Nigerian Government later revealed that 52% of these loans were to youths and women-owned businesses. Well, this is all we have time for today. A lot is desirable about social policies in Nigeria. Again, the important questions – how does the government measure impact? Who are the beneficiaries? How exactly are beneficiaries vetted? Who can verify exactly where funding goes? Until these are answered, the FG may unveil policy after policy, with no tangible evidence of change. Finally, do you know anyone that received any of the above funds? We would like to check something…
Consumer rights in Nigeria
On the back of our journey into Nigeria’s digital economy, we’re heading straight to legalese. Today, we’re all about consumer protection. What are the rights of a Nigerian consumer and how can these be enforced? Welcome back, ladies and gentlemen! Let’s get to it! First, who is a consumer? A Nigerian author defined a consumer as a person who buys products or services for personal use and not for manufacture or resale. What then is consumer protection? Consumer protection is everything we do to prevent consumer exploitation. Through consumer protection, the government ensures that consumers derive maximum satisfaction from the services available in the market. The Nigerian government has passed several laws and set up several agencies to protect the rights of consumers – NAFDAC (National Agency for Food and Drug Administration and Control), SON (Standards Organization of Nigeria), NDLEA (National Drug Law Enforcement Agency) and the FCCPC (Federal Competition and Consumer Protection Council). This article dwells on the FCCPC as a beacon for consumer protection in Nigeria. The Federal Competition and Consumer Protection Act On 5th February 2019, the President assented to the Federal Competition and Consumer Protection Act (FCCPA). In summary, the purpose of the Act is to remove monopolies and market dominance, alongside protecting the rights of Nigerian consumers. In the Act, reference is repeatedly made to the consumer (the person who buys a good or procures a service), the undertaking (the person who supplies the good or service) and the commission. Remember these. So, what rights do you have under the FCCPC? A number of interesting ones really… Rights of a consumer The right to information. A consumer has a right to information in plain language. So, an undertaking that displays goods or services for sale must display the price of these goods/services. The Act further provides that an undertaking cannot require a consumer to pay a price for any goods or services higher than the price on display. No kidding. An undertaking must not mislead consumers as to a trade description. That is, they may not claim that goods have a particular feature when they do not. A supplier even has the responsibility to correct a misunderstanding on the part of a consumer. Importantly, where a consumer agreed to purchase goods because of a description or sample, the goods delivered by the undertaking must correspond to that description or sample. Yes, this means that what I ordered vs. what I got is illegal. In fact, when an undertaking supplies second-hand goods, they must notify consumers that the goods are second-hand. An undertaking is further mandated to provide a receipt to every consumer that is supplied goods/services. The right to cancel and seek refund A consumer has the right to cancel any booking, reservation or order, subject to the payment of a reasonable charge. A consumer has a right to return goods (within a reasonable time after delivery) and receive a full refund in two scenarios – first, when goods are purchased for a particular purpose and it turns out that they are unsuitable. Second, when the consumer did not have an opportunity to examine the goods before delivery and it happens that the delivered goods do not correspond with the description, sample, type and quality that was agreed. The consumer may return goods within three months of delivery. The right to examine A consumer has the right to select or reject from the goods on display before paying. A consumer is not responsible for any damage to goods on display unless the damage is a result of carelessness, malice or crime. Responsibilities of an undertaking An undertaking cannot limit or transfer its risks through a notice to the consumer. That is, an undertaking cannot claim to not be responsible/liable. Yes, all the businesses with a “no refunds” policy may be wrong. Also, an undertaking has a duty to label goods properly so it can be easily traceable. They have a duty to notify the public of risk as well as an obligation to withdraw hazardous goods. Where damage is caused to a consumer by defective goods/services, the undertaking that supplied the goods/services is strictly liable for the damage. A person affected by the defective goods/services has the right to sue. Most importantly, how do you enforce consumer rights? How do you sue? How do you sue? When a consumer seeks to enforce a right under the Act, it/they may refer the matter to the (defaulting) undertaking, to an industry sector regulator or to the Commission (the FCCPC Commission). A consumer may also approach a Court directly. Where a matter is referred to the Commission, it may issue a “notice of non-referral” if the matter is groundless. If the matter has grounds, the Commission may refer the complaint to the industry sector regulator or may direct an inspector to investigate immediately. After receiving the report of the investigator, the Commission may issue a notice of non-referral, make an order or issue a compliance notice. Ultimately, a wronged consumer has a right to begin a civil action for compensation in a court. Anybody who contravenes any consumer rights is liable to imprisonment for five years or N10,000,000 or both. In the case of a company, it is liable to N100,000,000 or 10% of its turnover whichever is higher. Also, each director is personally liable. Well, there you go!
Nigeria’s Emerging Digital Economy (2)
Our new series examines the many facets of Nigeria’s digital economy, the efforts of the Nigerian government to propel it and its relationship with governance and prosperity. Last week, we took on Nigeria’s digital infrastructure and the state of financial inclusion. Today, we’re onto digital inclusion, financial technology and technology in government. Last week, we concluded by noting how mobile phone usage offers the most realistic means of improving financial and digital inclusion… Mobile phones Indeed, mobile phone usage offers the most realistic means of improving financial and digital inclusion. While internet penetration is a little over 40%, Nigeria already has a mobile phone penetration rate of 87%. Meanwhile, the adult literacy rate is 62%. This reinforces the belief that persons only need a basic education to use phones. Do they need to be wealthy either? No. Recycled phones dominate the Nigerian market. Also, mobile phone brands like TECNO, Infinix and Itel that are made specifically for the low budgets of Nigerian users. For Nigeria to reap the dividends of mobile connectivity, 4G-enabled mobile phones must be made even more attainable for the entry-level market. One way policy makers can achieve this is by reducing the tax burdens on mobile phones and services. They must begin to perceive these as a necessity, instead of a luxury. Indeed, the use of mobile phones impacts significantly on the Nigerian economy. Besides affording small businesses the means to participate in e-commerce, it has become the fulcrum for another emerging sector – fintech. Fintech The Nigerian financial system has been quite receptive to the introduction of technology. Mobile banking solutions are driving the banking sector. Alat by Wema Bank and 737 by GTBank are some of the digital banking platforms that offer financial services 100% online. Platforms like Flutterwave and Paystack are enabling online payments for businesses. Piggybank helps Nigerians save, PayLater and QuickCheck allow users access quick loans. Nigeria’s fintech thrives on the back of rapid technological advancement, foreign investment and a young population. Frost and Sullivan expects Nigeria’s fintech revenue to reach US$543.3 million in 2022 from US$153.1 million in 2017. According to Weetracker, Nigerian startups attracted $663.24 million in venture capital last year, by far the largest share in Africa. Interswitch ($200 million) and Opay ($170 million), two payment platforms, accounted for almost half that number. And we all know about Paystack’s recent deal… However, the greatest challenge the fintech sector faces is regulation. Regulators must decide on how to regulate innovation without killing it. Within the past year, federal and state governments have enacted regulations and imposed fees with reckless abandon. It is perhaps wiser to allow innovation to grow without hindrance. This way, there will be plenty to tax later. Governance and Sustainability It is useful to add that digitization is not only enabled by governance, it can also contribute to it. The adoption of digital technologies can improve public service delivery and public accountability. Kenya is Africa’s leader in terms of digitization. Its digital economy contributed 87% to GDP in the third quarter of 2019 (while Nigeria’s contributed 14%). Attention should also be drawn to how digitisation has improved public revenue collection and saved $290 million in efficiency gains over four years. Digitisation will reduce costs of service delivery while also improving their quality and coverage. For instance, quality of service can be improved by creating feedback flows from citizens to public service providers. This feedback can be used to improve government agencies, ministries and other institutions for public service. Digitisation projects are notoriously likely to run over budget, experience delays and eventually fail to deliver results. The foundation must therefore be laid, one that entails ready infrastructure, capacity building within government institutions and digital literacy amongst citizens. Ultimately, political will. To leverage digitization and automation for transparency and accountability, political will is key. It will reap evident rewards. In June 2020, the Head of the Civil Service of the Federation explained how a platform, IPPIS (Integrated Payroll and Personnel Information System) had determined the actual number of serving public servants. By cleaning Human Resource data, it had saved the government at least 60 billion naira. Experts say that if Nigeria digitally transforms and integrates the information and communications systems of its public sector, it can save $5.6 billion annually. Finally, in adopting digitization, the government must also engage and orient stakeholders. The current ASUU (Academic Staff Union of Universities) strike was ignited by the insistence of the federal government to pay university lecturers through IPPIS. Perhaps a little more chill next time?
Nigeria’s Emerging Digital Economy (1)
Do you recall those pictures of Isa Pantami? That showed the Minister of Communications and Digital Economy stunning his audience with fitness exercises? The Ministry captioned them “STAYING FIT TO DELIVER EFFECTIVE SERVICE! The Honourable Minister of Communications and Digital Economy, @DrIsaPantami demonstrating to management Staff of the Ministry some exercise tips during the ongoing 2-day retreat.” Well, this post is about everything else – what the Ministry should be prioritizing in giving Nigeria the Digital Economy lead. Stay here! The global digital economy was worth $11.5 trillion in 2016, 15.5% of global GDP. It is expected to grow to 25% by 2020, faster than the global economy. The Nigerian digital economy is making its own strides, contributing 14% to GDP in the third quarter of 2019. The NIPC (Nigerian Investment Promotion Commission) believes that it would generate $88 billion by 2021. Meanwhile, a report released by Google and the International Finance Corporation (IFC), estimates that Africa’s internet economy has the potential to reach 5.2% of the continent’s gross domestic product (GDP) by 2025, contributing nearly $180 billion to its economy. Our new series will therefore examine the many facets of Nigeria’s digital economy, the efforts of the Nigerian government to propel it and its relationship with governance and prosperity. Today, we’ll take on Nigeria’s digital infrastructure and the state of financial inclusion! What is Nigeria doing? Nigeria’s efforts The Nigerian government has vocally prioritized the digital economy. In November 2019, President Muhammadu Buhari unveiled the National Digital Economy Policy and Strategy (NDEPS), a so-called guide for the digital economy. The Digital Economy drive has apparently begun. At the forefront is the Ministry of Communications and Digital Economy. In August 2020, the Minister, Dr. Isa Pantami, announced that it had completed 11 projects under said drive and was commissioning Phase 2. In December 2019, he had said that a pervasive broadband penetration would make Nigeria a truly digital economy. He said this at the launch of the Nigerian broadband plan for 2020-2025. The ambitious plan aims at increasing broadband penetration to 90% by 2025. Accordingly, internet speed would be a minimum of 10 megabits per second (Mbps) in rural areas and 25Mbps in urban areas. Also, data would be affordable at ₦390 per 1GB. Well, 5 years to go! Assessment The World Bank launched the Nigeria Digital Economy Diagnostic Report in 2019. According to this report, with improved digital connectivity, digital skills and literacy, Nigeria can reap benefits from the digital economy. To achieve this however, Nigeria must build the five pillars of a digital economy, as formulated by the Digital Economy for Africa initiative (DE4A). They are digital infrastructure, digital platforms, digital financial services, digital entrepreneurship and digital skills. These criteria introduce interesting talking points. How well is Nigeria doing? Digital infrastructure Nigeria faces a dearth of infrastructure, without which the digital economy cannot thrive. Connectivity is minimal in rural areas, leaving a significant percentage of the population without internet access. To achieve broadband penetration, for instance, extensive broadband infrastructure is key – deployment of fiber optics and connection to towers, from the shores to the hinterlands. Financial inclusion Nigeria also faces challenges with access to financial services. 41.6% of Nigeria’s 190 million people are financially excluded. Only 29% of adults have bank accounts. In 2012, the Nigerian government, through the Central Bank, launched the National Financial Inclusion Strategy to achieve 80 percent inclusion by 2020. Reports show however that financial exclusion has only reduced by 2.9 percent (from 39.7 percent in 2012 to 36.8 percent in 2019). What is the challenge with financial inclusion? The hurdles range from formal means of identification for millions to proximity of financial institutions. Poverty and illiteracy are also barriers to financial inclusion. 60% of Nigerians live below the poverty line. In 2018, Nigeria overtook India as the country with the largest number of extremely poor people. Northern Nigeria is predictably the worst hit. The result? 20.7 million of its adults are financially excluded. In addition, only the financially literate can maximize the opportunities of a financial system. And a vast majority are illiterate. Low enrollment in basic education and the poor quality of that education cripple both financial inclusion and digital inclusion. A lack of digital skills in the curricula segments digital skills into a slim share of the population. The absence of up-to-date training in STEM (Science, Technology, Engineering and Mathematics) and the inadequacy of equipment in schools ultimately result in the exclusion of the poorest from the benefits of the digital world. Nigeria must therefore close the digital skills knowledge gap. Perhaps, by increasing higher level education and creating online training initiatives to reach people wherever they are. Ultimately, mobile phone usage offers the most realistic means of improving financial and digital inclusion… We must stop here. We will discuss this and more next week. Stay glued!
Insurance in Nigeria: The Industry
The global insurance industry maintained steady growth in 2019 as premiums increased by 3.0% to $6.3 trillion representing 7.2% of Global GDP (Gross Domestic Product). Insurance is a big deal everywhere else. This post examines the Nigerian situation. What makes up the Nigerian insurance industry and how is it doing? Stakeholders According to BusinessDay, 57 registered companies make up the Nigerian insurance industry. 14 of them are life insurers while 43 are non-life insurers. There are also 2 reinsurance companies whose roles are to provide technical security and capacity for the insurance companies. Most insurance companies are incorporated pursuant to the Companies and Allied Matters Act 1990 (An Act that has been replaced with the Companies and Allied Matters Act 2020). Other stakeholders include agents (individual and corporate), brokers, surveyors and third party administrators servicing health insurance. There are 460 registered insurance brokers and about 15,000 insurance agents. The Nigerian insurance market has been described as a brokers’ market because brokers currently control over 90 per cent of the premium income, with less than 10 per cent for insurance agents and even direct marketing channel by insurers. The National Insurance Commission (NAICOM) is the regulator that exercises supervisory and administrative capacity over the insurance business in Nigeria. How is the insurance industry doing? In the Nigerian insurance sector, growth was faster than the country’s economic growth of 2.3%, as the sector expanded 3.6% in 2019, according to the National Bureau of Statistics. In June 2020, Fitch Solutions predicted that the Nigerian insurance sector would witness considerable growth in the medium to long term, despite an interruption in 2020 due to the COVID-19 pandemic. The life insurance segment is expected to grow its premiums to as much as N207.96 billion by 2024. On the other hand, the non-life insurance segment of the market (which is significantly larger), is projected to grow its premiums by a revised 2.9% to N248.85 billion in 2020. It was however mentioned in the report that these projected growths are not going to come about easily, mainly due to Nigerians’ general lack of enthusiasm for insurance. In our last post, we said a lot about the insurance culture. Didn’t we? According to Fitch Solutions, premiums growth will continue to be limited due to expected low average earnings by the insurance firms. Widespread poverty and general indifference were identified as a major factor making it impossible for a lot of Nigerians to access insurance covers. Could they have foreseen October though? Hoodlums and what not As you know already, peaceful protests staged against the activities of the Special Anti-Robbery Squad (SARS) were hijacked by hoodlums, who then began the destruction of both private and public properties. Remarkably, the Lagos State Governor, Babajide Sanwo-Olu, was reported to have said the state alone would need N1 trillion for reconstruction after the destruction caused by the hoodlums. Importantly, stakeholders expect insurance claims to run into billions of naira. Would this be overwhelming for the insurance players? The sector is yet to recover from the effect of the Covid-19 pandemic which has resulted in an increase in health, travel and business disruption claims. Afterall, it posted a contraction of 29.53% in the second-quarter GDP report published by the National Bureau of Statistics (NBS). Foreign interest According to Oxford Business Group, Nigeria’s insurance sector is attractive chiefly for its potential. The number of uninsured prospective customers is among the world’s largest within a single market. Nairametrics noted that foreign players have been showing serious interest in the Nigerian insurance sector. A typical example is AXA, a French insurance company which has stakes in Nigeria’s AXA Mansard Insurance Plc. Other examples are South Africa’s Old Mutual Ltd and Sanlam Emerging Markets (Proprietary) Ltd. Way Forward Agusto & Co noted that with more than half of the population living below the poverty line, the idea of insurance is unthinkable to a significant number of Nigerians. In addition, consumer purchasing power continues to be negatively impacted by high inflation. Thus, there is a need for insurers to offer specific products that cover just the right amount of insurance that is desired at various income and demographic levels. Afrinvest Research advises that it is pertinent that micro-insurance policies – which are specially designed for the low-income market, micro and small-scale enterprises – are promoted. In this regard, NAICOM recently licensed two full-fledged micro-insurance companies, GOXI and Cassava Micro-insurance companies, to offer life and general micro-insurance services in Lagos state. Finally, insurance operators have under-invested in consumer education, thus creating a vacuum that leaves consumers and operators as losers in the game. Investing in consumer education could help to restore confidence in the Industry and align expectations appropriately.
Investment Opportunities for these Corona Times
Nigeria’s index case of Covid-19 arrived in Italian packaging on February 28, 2020. On 24th March, Lagos State declared a lockdown after 30 cases in the city and 46 cases nationwide. A national lockdown followed on 30th March. And so the story continues… 2020 needs to calm down. The lockdown has been eased in many parts of the country, but it is uncertain when economic activities will resume. According to the International Monetary Fund (IMF), the global economy will shrink by 3% this year. It described this decline as the worst since the Great Depression. Oops.Relax, though. We come with good news. This post centres on two investment opportunities you can exploit during this period. The following options are not entirely immune to present economic challenges, but they are doing better than others. Stay with us! Real Estate What’s up? The Nigerian Economic Report shows that Nigeria’s real estate sector is the third largest contributor to its GDP. Yet, the World Bank estimates that the country has a 17 million housing deficit. Coupled with the steady growth in the country’s population, these reveal investment potential. Investing in real estate, especially in commercial parts of the country, attracts high returns. According to Reuters, a successful investment can earn returns as high as 30-35 percent! There are many options available to the real estate investor. You may consider property development. You may consider renting, as statistics reveal that 87% of Nigerians live in rented apartments. You may just own land. After all, owning land is a hands-off investment. Oh, you may also consider land flipping – buying in areas that are developing and selling for profit months/years later. What’s fun? REITs. Real Estate Investment Trusts allow you to make real estate investments without actually acquiring a property. It is a collective investment scheme – different investors pool funds to buy property. The portfolio is managed by a professional. REITs are regulated by the Securities and Exchange Commission and traded on the Nigerian Stock Exchange, just like shares. What’s new? Taxes. In July, there was outcry when the Federal Inland Revenue Service (FIRS) imposed a 6% stamp duty on all tenancy and lease agreements. The Chairman (of the FIRS) later clarified that this rate only applies to agreements that exceed 21 years. Where the tenancy is yearly or less than seven years, the rate would be 0.78%. In tenancy from seven years to 21 years, the applicable rate would be 3%. Agriculture What’s up? Nigeria is largely an agrarian economy. According to the National Investment Promotion Commission (NIPC), the agricultural sector contributes 25% to the national GDP and accounts for 40% of the labor force. The sector’s growth has averaged 4% over the last 5 years. Therefore, agriculture has proven to be a profitable investment. Reliable too. No matter what, Nigerians will eat. Last year, 57% of the Nigerians’ total spending was on food! What’s new? The national accounts show that the agriculture sector grew by 2.2% in the first quarter of the year. However, restrictions on movement have predictably slowed farming – impeding farmers’ access to markets and the distribution of products. The threat this poses is rise in costs (and food price inflation). However, agriculture benefits from numerous interventions by the federal government. The CBN consistently improves farmers’ access to credit. In August, the Federal Government launched an intervention scheme called the Agric for Food and Job Plan. It is designed to create about 5 million jobs in the sector and add about 10 million metric tonnes of food. Loans are given to farmers at 0% interest rates. What’s fun? Agriculture requires continuous involvement. If you are not interested in direct farming however, you can consider crowdfarming. Digital crowdfarming allows several persons to invest in smallholder farms for a particular farm cycle. The investors share in profits (usually an ROI of between 15 – 30%). The process happens online so no physical interaction is required. However, you are advised to confirm the legitimacy of the platform you choose, as well as its insurance cover! Well, that is all we have time for in this episode. Look at us. Out here caring about you and your money. We hope this article was informative and useful. Stay with us for more content!
Advocacy: Tax Compliance in Nigeria (2)
Welcome to Tax 101 class! A tax is a compulsory levy imposed upon a taxpayer by the government in order to fund various public expenditures. Now, remember the following. First, it is not a willful or voluntary donation. This is not charity LOL. Second, it is usually imposed by law. Lagos boys storming your office to collect owo-ile does not count, unfortunately. Third, it is not in direct exchange for a benefit. Finally, deliberate failure to pay tax is generally punishable. Tax evasion Last week, we casually mentioned tax evasion. What is tax evasion and how is it different from tax avoidance? Well, tax evasion is the illegal evasion of taxes by taxpayers. Tax evasion often entailsdeliberately misrepresenting the true state of one’s affairs to the tax authorities in order to reduce tax liability. Also, declaring less income, profits or gains than the amounts actually earned. Or, overstating deductions. This one is illegal. You can be imprisoned. Ask Wesley Snipes. In contrast, tax avoidance is the legal use of tax laws to reduce one’s tax burden. This is not illegal. It is being sharp as a blade. Got it? Wesley Snipes, Blade? Tax administration Another casual mention was the Federal Inland Revenue Service (FIRS). Who are these and what do they do? Well, they are a machinery for tax administration. Tax administration is the implementation of the various tax laws in a country in order to achieve its objective. In Nigeria, tax administration is carried out by the three tiers of government – the Federal Government, the State Governments and the Local Governments, through the machineries they set up. Tiers of government, not organs. Come on now. The Federal Inland Revenue Service (FIRS) is the body empowered to “administer” at the federal level. The States’ Governments administer tax through the various State Boards of Internal Revenue. The Local Government Revenue Committee of each State administers taxes at the local government areas. Finally, there is a Joint Tax Board (JTB). It is made up of officers of the federal and state tax authorities. It serves as a big umbrella covering all tax authorities in Nigeria. The official role of the JTB is purely advisory. Taxes Now what taxes are imposed in this country of ours? What are their rates? And which bodies are responsible for administering them? Keep reading, let’s teach you… 1. Personal Income Tax (PIT) This is imposed on income of individuals – employees, families, trustees, executors, sole traders, partnerships, estate. The relevant tax authority may vary from the FIRS to the various State Boards of Internal Revenue. 2. Companies Income Tax (CIT) This is one of the main taxes administered and collected by the Federal Inland Revenue Service (FIRS). It is paid on the income of incorporated companies. Ordinarily, the rate of this tax is 30% of a company’s total profit minus “all expenses for the period which a company reasonably incurred in generating the taxable profit”. But companies with a turnover of N25,000,000 and less are now exempt from Companies Income Tax and Value Added Tax. 3. Value Added Tax (VAT) This is a tax charged on the sale of specified goods and services at the rate of 7.5%. The FIRS administers and manages VAT in Nigeria. 4. Tertiary Education Tax (EDT) This tax is also administered by the FIRS. The rate is 2% of assessable profit. It is imposed on all companies registered in Nigeria and put into a fund. The amount in the fund is distributed between Universities, Polytechnics and Colleges of Education in the ratio 2:1:1 respectively. 5. Stamp Duties Stamp duties due are chargeable on the execution (signing/stamping) of certain documents/transactions. The stamp duties of individuals are paid to their respective State Governments, while corporate bodies pay theirs to the Federal Government. The stamp duties rates applied by FIRS are in two forms – flat rate charges and ad valorem charges. 6. Capital Gains Tax (CGT) This is a tax charged where there is a disposal of assets. Where any capital sum is derived from a sale, lease, transfer, assignment, compulsory acquisition or any disposition of properties classified as chargeable assets. CGT is usually charged at a flat rate of 10% on chargeable assets. 7. Petroleum Profit Tax (PPT) This tax is imposed on income of companies in petroleum operations (upstream). Downstream guys pay CIT. Companies liable to PPT are not liable to Companies Income Tax (CIT) on the same income. 8. Customs and Excise Duties These are taxes charged at Nigeria’s Port of Entry on certain imported goods. It is usually administered and collected by the Nigerian Customs Service. There are two types of taxes charged at the Nigeria Port of Entry; one is on imported goods and the other is on some exported goods. Phew! Now that is a long list of taxes, isn’t it? Finally, what happens when there is a dispute between a taxpayer and an administrative body? Well, they usually go to the Tax Appeal Tribunal. This tribunal is vested with the power to determine disputes arising from all federal tax legislations. It is an administrative appeal body, not a court of law. If the decision of the TAT does not appease either party, they can appeal to the Federal High Court. Wooh. Now look how much you have learnt in 5 minutes! Look who’s a tax expert already. Tuesdays are for blog posts. We’ll return next week.
Insurance in Nigeria: The Culture
“Our Lekki store has been vandalized and looted. But, we acknowledge that this is only a setback compared to the larger issues we are all facing as a nation, and our thoughts and prayers remain with Nigerians everywhere, and for a peaceful resolution to various issues at hand. Rebuilding a supermarket is hard. Rebuilding a nation is even harder. We stand with you Nigeria. Stay focused. Be the solution.” SPAR Nigeria had this to say after its supermarkets were looted by hoodlums. That must have been hard. For them, or their insurance company. A lot is happening in Nigeria. Notably, looters are looting government offices, banks, shopping malls, media houses, toll plazas, private offices, etc. Vehicles, buildings and properties have been set ablaze or looted. It raises interesting questions for insurance companies, doesn’t it? When the dust settles, businesses will calculate their losses and make claims. In the coming weeks, we will take on Nigeria’s insurance industry. Today, we chose to look into the insurance culture in Nigeria. Do Nigerians insure? Why or why not? What do they insure against? Welcome! Do Nigerians insure? Not really. Nigeria’s adult population was 99.6 million in 2018. 40% had access to financial services. However, only 1.9% of them had insurance coverage. Insurance penetration remains low and the insurance industry contributes about 0.3% to Nigeria’s GDP. The industry has been relegated to the background in a financial services sector that has produced more prosperous industries such as banking and pensions. Why are Nigerians not insured? Many inefficiencies plague the insurance sector – poor regulatory enforcement, weak corporate governance & risk management framework. However, the greatest of these may be the dearth of innovation. While tech has jumped on other financial services, it is not jumping on insurance, is it?Well, tech is an enabler. The reason why there is tech in banking and investments is so that they can do what the traditional banks are doing more efficiently. But the demand was always there. Meanwhile, knowledge of the insurance industry is extremely low as a combination of low income and perception about the industry has affected the reach of insurance services. The insurance culture Nigerians are very poor. Simply, people with low income cannot afford to subscribe to insurance services. A study by EFiNa revealed that at least 30.8% of Nigerian adults say they cannot obtain insurance services because of economic constraints. 15% of them say they can’t afford it, while 14.9% say they have nothing to insure. Nigerians are also quite religious. People pray against bad things and hope God prevents them from coming their way. Meanwhile, insurance recognises that bad things do happen but can be recovered from. Why take motor insurance coverage against accidents? Doesn’t that show a lack of faith in God’s power to protect? Life insurance is called funeral insurance in other countries. But who wants to hear “funeral” over here? Eh? God forbid. Finally, Nigerians are not very trusting. Specifically, this relates to a conception that it is difficult to get insurance companies to pay claims. Oh, Nigerians have a general, uncompromising distrust for financial service providers including bank offerings like loans. They are also unaware of how the industry works. According to a World Bank report, over 30% of Nigerian adults are not aware of insurance. Hope in compulsory insurance… Well, government regulations are an important driver for insurance adoption. A World Bank-sponsored report explained that “compulsory insurance… continues to be a strong driver in the market.” The GPI (gross premium income) of the Nigerian Insurance Industry was N356 billion in 2016. This GPI growth was driven by the six compulsory insurance policies: • third party motor insurance,• employer’s liability insurance,• group life insurance,• builders’ liability insurance,• healthcare professional indemnity insurance• occupiers liability insurance. These products are concentrated in statutory insurance policies and also within the formal sector. The insurance industry pursues a strategy of selling compulsory insurance policies to the formal economy (representing about 40% of the economy). Compulsory insurance explains why motor insurance takes a giant share of the market. Between 2007 and 2011, it accounted for over 29% of the gross written premium for general insurance. Regardless, even motor vehicle insurance indicates low value for customers. According to techcabal, Nigerian drivers paid ₦40.3 billion ($103.2 million) as premium for motor vehicle insurance in 2016. Most drivers favoured compulsory third party insurance over comprehensive insurance. Yet when accidents happen, very few people go back to claim their insurance. This was limited to ₦1 million ($2,580) for third party insurance in 2016. The ratio of motor vehicle claims paid relative to the premium collected was 0.43. Already, you may be asking “can anything good come out of the Nigerian Insurance Industry?” Who is the regulator? NAICOM (National Insurance Commission)? What is their role and what have they been doing? What are the new tech and innovation trends in Nigeria’s insurance sector? What are the government initiatives and investment incentives? Maybe we can answer these next week…
Advocacy: Tax Compliance in Nigeria
On September 17, the federal government asked Nigerians who own bank accounts to obtain and complete self-certification forms, to be issued to them by their banks. And why? The statement read, “The forms are required by the relevant financial institutions to carry out due diligence procedures in line with Income Tax Regulations 2019”. Expectedly, social media was set on fire. A day after, the federal government backtracked on this statement, saying the notice did not apply to everyone. The drive for tax revenue continues… Oh you must know the quote already. That one about death and taxes? Benjamin Franklin? Yeahhh. The only things certain in life are death and taxes. Somebody defined taxes as a debt owed by citizens of a country to their government. Hardcore eh? Taxes may be direct or indirect. Regardless, remittance is essential to governments and their budgets. Yes, this is why the government takes it personal. Tax compliance refers to the extent to which the tax paying population of a particular country complies with its tax laws and policies. Ideally, tax compliance involves timely and complete fulfillment of tax obligations. According to the World Bank Group, the importance of taxes and tax compliance lies in the need for a sustainable source of funding for social programs and public investments. Eventually contributing to a country’s economic growth and development. In Nigeria, tax compliance is increasingly a big deal. Well, it should be. Crude oil accounts for 70% of the country’s revenue base. And oil revenues are falling, so the country is going broke. Meanwhile, tax evasion has had its way for too long. In 2018, the Federal Inland Revenue Service (FIRS) found that over 6,700 billionaires do not pay taxes in Nigeria. Haha, wave your hand if you did not know we had that many billionaires in this economy. Also, the informal sector of the economy remains largely untaxed. In 2019, the FIRS generated about N5 trillion, relatively high numbers, but N3.7 trillion below its target for the year. Nigeria’s tax to GDP ratio is a sad 6%. To offer comparison, the tax to GDP ratio in a prosperous country like Norway is a staggering 54.8%. And so our country remains the poverty capital of the world. Over 82.9 million Nigerians are poor. In the second quarter of 2020, the nation’s economy contracted by -6.10 percent. As it stands, the country will have to borrow record numbers to fund its 2021 budget. The need to raise tax revenue is iminent. Tax compliance must improve. But how? What are the factors responsible for non-compliance in Nigeria? Well, the demographic makeup of the country, citizens’ unresponsive behavior towards taxation, as well as the faulty tax system. Nigeria needs to revisit (and modify) the policies and laws governing the tax system. Perhaps they should be more just. Wealthy Nigerians are barely taxed. Perhaps an introduction and enforcement of a luxury tax will improve the situation? Then, tax registration and payment processes should be made simpler. Perhaps some more digitization should be employed. It is tax, why should payment be difficult? Also, tax laws should be made easy to understand. People should be able to ascertain their obligations easily. However, the most important point is transparency in the tax administration system. The Federal Inland Revenue Service should be made accountable to the public. The government too. The social contract theory is not a superstition. The payment of taxes should cajole the government into doing the needful for citizens. If people see their revenue being put to productive use, they will be more responsive! They should be.