The CEO Interview
‘We are pioneering a game-changing solution in risk management’
Olalekan Abiola is the managing director/chief executive officer of RSL Derivatives Global Services Ltd, an alternative risk financing consulting firm based in Lagos. In this interview, he speaks on credit risk financing in Nigeria, the role of RSL Derivatives, the firm’s focus on risk financing solutions using alternative risk transfer (ART) and its contribution to the growth of MSMEs in the country, among other issues. Excerpts:
What is credit risk financing all about?
Credit risk financing in financing business parlance has to do with financing possible risks associated with credit activities. In banking, this relates to financing credit default, what you can also call credit enhancement. Risk financing is usually done through two platforms – transfers or retention – and there are various methodologies used in either case. In the advanced world, there are various forms of derivatives, e.g., credit default swap used in transferring credit risk. Locally, banks have been using retentions in form of statutory provisioning to finance possible credit defaults in their books, and then there are few insurance companies offering credit life to cover the linear portion of possible credit default, particularly as it relates to consumer loans. This is, however, limited in coverage and scope.
Today, RSL Derivatives has reconfigured these possible worldwide solutions to fit into our local need by offering a risk financing solution that will protect possible credit default 100 percent (principal + interest). Our brand of credit enhancement solution is a combination of evaluation, control and monitoring, and risk financing by way of customer cooperative or retention group in one pot with a peculiar uniqueness of the borrowers and the lenders helping each other. So today, we are saying the lenders (banks) can expand their lending portfolio, earn 100 percent income, funds protected, and eliminate provisioning, while the customers across the board are sure they can get funds from the banks and at a good cost.
What is the role of RSL Derivatives?
RSL Derivatives came into the market to pioneer a 100-percent credit enhancement regime. As I said earlier, our role is to effectively begin to entrench fundamental principles of risk financing, what we also call alternative risk transfer as applicable to banking credit default risk. I am very cautious to say principles because all over the world risk financing solutions, either by transfer or by retention, rest on the same principles of large number. It is a probability theory. So what we have done at RSL Derivatives is to use our understanding of this theory and the peculiarity of our environment to develop a world-class solution that will address credit default protection in Nigeria. Here is a solution that in development had factored in the need of the banks for 100 percent protection and the expectation of customers in paying for protection under cooperative retention system and be sure of getting something back once they fulfil their repayment obligation.
We are clearly redefining how credit risk is perceived, how default could be protected, and practically getting both borrowers and lenders to be responsible to each other and, luckily for us, a lot is changing. Today, credit analyses skills within the banking industry are improving and credit bureaus are here to support. The control processes, both internal and external, are getting better.
We are pioneering a game-changing solution that gives more benefits to the financial industry and their customers, either as an individual consumer or as a corporate customer. The solution will expand the scope of financial inclusion and financial reach across board, and even those individuals and businesses who before now could not access funding will be able to access fund, and at lower cost, as we progress.
Our role is to develop a solution to fill this gap, which we have done. We are also saddled with the responsibility to prove the concept, which we have also done, and we would continue to expand the scope of our offerings, continue to engage and educate all stakeholders on alternative risk transfer using RSL Derivatives model. Hopefully, the banking industry and the economy will be better for it.
How does the alternative risk financing option work?
As I said earlier, all risk financing solutions work on the principle of large number and what we have done is to adapt that fundamental solution into our local environment. Our model is very scientific and highly technical to be explained on the pages of newspaper, but what I will say is that it is not a cut-and-fit solution. Even though the underlining principles are the same, structures differ from type of credit risk and portfolio. However, a common feature you will see in all solutions will be an effective combination of transfer and self-retention using a bit of customer cooperative and a bit of retention group models.
The variance with whatever you will see abroad or in other countries is that the protection fund – the cumulative of protection fees – itself is being created by the consumers, and certain part of the fund is treated as risk investment fund, and as such, customers who fulfil their repayment obligations get risk-adjusted investment return and cashback as defined by the solution. That changed the complexity of how risk is being covered in this environment. That begins to open us to a point where your risk, even though it is covered and you have paid for it, if you meet your obligation, you can get something back.
What is imperative to mention here also is that the solutions, from product to product, must be self-sufficient in terms of coverage capacity. For instance, our consumer portfolio solution has a coverage capacity of over 600 percent while the MSME portfolio coverage capacity is about 355 percent.
Could you give a synopsis of the current offerings of RSL Derivatives?
Even though for the past eight years we have developed an array of services and products, we currently offer two variants of protection to Nigerian banks – one focussing on consumer/personal loan and the other focusing on micro, small and medium scale businesses. The consumer loan is called Default Protection Plan (DPP) which is a combination or an infusion of risk transfer and customer cooperative retention, and we are currently working with three banks and others are taking to us. It allows the banks to secure their lending for consumer-related loans in the market and cover themselves against defaults and in return, consumers, irrespective of the rating of the employer, as long as the employer payment integrity can be ascertained, can have access to funding. Under this beat, we offer products like rent-a-month, school fees, and other personal loans for customers cutting across salary earners and self-employed professionals, and subject to banks’ requirements.
In the MSME space, we offer a solution called Investment Protection Fund (InPF), a.k.a. Paris Klub SME. It is a pure customer cooperative retention scheme. Here, we are working with two banks and several others are currently discussing with us and we hope to conclude with them soon. This scheme allows over 90 percent of MSMEs in the market that do not have those “hardcore collaterals” to borrow using the collective cover of Paris Klub SMEs, while the banks are covered 100 percent subject to their existing efficiency in credit administration. Our linear cover partners under these schemes are Leadway Assurance Limited and NEM Insurance plc, and neutral fund holders are Union Trustees Limited and StanbicIBTC Nominees, among other partners.
MSMEs are regarded as the building blocks of a strong economy. What is the contribution of RSL Derivatives to the growth of MSMEs in Nigeria?
I recently had a discussion with an adviser to the minister of Trade and Investment and I told him that our MSME credit enhancement solution, the Paris Klub SME, is what the market has been waiting for. Before reeling out statistics of the impact this solution will have on this economy, I mean quick and immediate impact, let me enumerate the major problems facing MSMEs in Nigeria.
The number one enemy of MSMEs in Nigeria is access to funding, nothing more. Cost of funding could be addressed, structure and organisation could be addressed, but we need to address the underlining reason while SMEs can’t access funding, which is collateral as requirement by the banks before lending.
As I said earlier on, over 90 percent of the SMEs don’t have the hardcore collateral and that is why the sector has been stagnant. If we want to grow the economy through MSMEs and we are deeply sincere about it, that is what we have to fix.
The good news is that this is what Paris Klub SME has come to fix, allowing SMEs to borrow without those hardcore collaterals but using the alternative cover created by our SME solution. It will not only provide access, it will over time reduce cost of borrowing and ensure SMEs are properly structured in an open market system and practically driven private initiative.
Now let me give you the impact in figures. SMEDAN has said that we have 7.12 million SMEs in the market, and we said what they need to grow is our solution. If we can support five million SMEs with our solution, and let us assume that each of those five million employs five staff, that will be 25 million employments generated. Let us then assume that in a worst case scenario each staff is being paid N100,000 per annum, what will be remitted as PAYE (pay as you earn) will be about N175 billion per annum.
If we push the businesses of these five million SMEs to return a profit of at least N5 million annually and government gives a tax discount on their income tax, that is, asking them to pay 20 percent instead of 30 percent, they will pay N5 trillion annually to government. If they file VAT, that is just filing only monthly, which is done at N5,000, they will return N300 billion per annum. Imagine the ripple effect of these on the economy. Imagine pushing the figures to 10 million, imagine monthly earning going up, imagine each of them employing 10 staff, or imagine each doing N10 million per annum, compare that with the national annual budget, compare it with what oil and gas is generating, what that will do to saving and deposit in the banks, what it will do to purchasing power and effect on consumer products, reduction in crime, etc.
That is what this solution will do to this economy. That is why I said what we are doing is a game changer. It can actually change the nature of the economy and in fact change our focus and take it away from oil and gas, and we will begin to look inward to begin to develop locally what we have. The other day I went for a meeting at Yaba Industrial Estate and was almost moved to tears seeing the neglect of the facilities there and how much it has been abandoned. Given the amazing quality of things produced there, all they need is little support.
And we have said to them at the Ministry of Trade and Investment: bring on Bank of Industry (BOI) as part of the open system, let banks book loans, let’s repackage it for BOI to buy, and let’s continue the cycle, within six months to one year we will jointly turn around this economy. That is our role.
We are aware that RSL Derivatives is currently located in Lagos. Given the vision you have for the MSMEs, would this not be a limitation? And what are your plans to solve this?
Today, our consumer portfolio is online. From any of the participating banks they can access our backend online now. For the MSMEs, it’s a structure. In every city, in every town across Nigeria today, we have what we call advisers. They represent RSL Derivatives in every corner of the nation. So, wherever you have a branch of any of the participating banks, you have an adviser working with them. We have the capacity to service anybody anywhere as long as there is a branch of the participating bank at that location.
What should Nigerians look forward to from RSL Derivatives?
RSL Derivatives has planted a seed, the philosophy will change a whole lot of things across board. And for stakeholders in this economy, whether we like it or not, if we all work together, objectively and sincerely, we will take this nation to the next level and we will all benefit from the good of the land.
However, for us in particular, we will continue to develop solutions and improve in our offerings to further enhance the quality of life and improve the economy. Today, it is consumer and SME; tomorrow, expect to see solutions that will be applicable to commercial and corporate banking, to housing and infrastructure development.
In fact, we strongly believe that our solution will further enhance the objectives of the National Mortgage Refinancing Corporation (NMRC). At a later date in future or very soon, NMRC will have to raise asset-backed bond in the market or do ABS in this market. Key to that will be credit enhancement. That is what we are offering: 100 percent credit enhancement. Developing an effective funding scenario for infrastructure will require credit enhancement; that is where you will begin to see the impact of RSL Derivatives’ solutions as we move along.
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