As smartphone ownership continues to grow across the entire continent, digital banking is set to become the primary form of money management. The effect on the future of the sector and the economy is huge, says Roy Zakka, CEO and Founder of Layer in an exclusive interview with Business Journal.

What is responsible for the rise of digital banking in Nigeria and Africa?

When it comes to telecommunications, much of Africa simply bypassed landlines and went straight to mobile. Mobile penetration is much larger than landlines, and that includes computing using a desktop and fixed-line. When you factor banking into that, we see that internet banking is immediately one of the most convenient things a person can do using their smartphone, so it really has been embraced large swathes of the population for that reason. Around half of the population in Sub-Saharan Africa now have a mobile phone subscription. Currently, just 1 in 6 of these users have access to 4G, but that number is forecast to double to 28% of the population by 2025. Nigeria has roughly 170 million mobile phone users, but only 10 to 20 percent of these are smartphones while the rest rely on more traditional mobile phones.

What was the current scope/volume of digital transactions in Nigeria and Africa in 2020 and 2021?

There’s two ways of putting this. Because much of Africa’s population is largely unbanked, if you drill down into those who do use banks, and then further into those whose customers use smartphones, then you can see that a very high percentage of those transactions will be mobile money and not traditional banking. But because those banks are still in the minority, for now, as are the number of users with the smartphone capability, but that is set to rise sharply in the next few years.

Does Nigeria/Africa possess the technical/technological expertise to sustain the digital trend?

At Layer, when we were building our platform for the United Bank for Africa, we developed a team of highly skilled engineers in Nigeria, including CIOs, CTOs and more. The platform now serves 22 million UBA customers across 20 countries, so there is an enormous talent pool in Africa. There are also a large number of multinational companies, that are helping to train a new generation that will be vastly more technologically aware and capable than the one that came before.

In addition to this, the FinTech scene is exploding in Africa, including a thriving ecosystem for investment, that is creating jobs skilled jobs and allowing young companies to expand beyond their borders. There is enormous opportunity and potential in the region, for indigenous companies as well.

What are the key challenges of sustaining and growing digital transactions in Nigeria/Africa?

Mobile transactions in Nigeria alone grew by 83% in 2020, so African banks are currently locked in a race to position themselves as innovative and frictionless, in order to secure market share. One interesting development is the Nigerian government launching eNaira, Africa’s first digital currency. This will enable further access to banking, enable more remittances and help grow the economy by billions of dollars.

At the same time, Nigeria’s young and tech-savvy population has eagerly adopted digital currencies, including cryptocurrencies, despite the Central Bank’s skepticism. To answer your question, innovation isn’t always about a complex solution, it’s about identifying what a customer base wants and needs, and being in a position to provide it to eliminate those pain points before they occur.

What do you believe is the right regulatory framework for digital banking in Nigeria?

That’s something that is a real opportunity for the operators. There are a lot of Neobanks emerging across Nigeria and Africa, three or four in the last year alone. Going back to the smartphone growth, these banks have direct access to new customers in a way the traditional banks do not. As a result, the traditional banks are facing huge competition, and the regulator needs to be in a position to ensure that competition remains fair, especially as the price of individual smartphones gets lower and lower.

In this rising era of digital transactions, what is the fate of cash going forward?

I believe that due to the pandemic and those other factors we’re talking about here, cash is no longer king. We have seen in Singapore, for example, the government introduced a central database where everybody just had to go on once and verify their name and phone number, and transferring money from one person to another became completely frictionless in a system managed by the state, as opposed to any neobank or fintech app. I have no doubt that this is the future, sending money via the phone. Whether that is through a certain app or some other way, I can’t tell, but the days of cash are in decline and they are not going to come back.

How should regulators respond and counter cybercrime in the digital banking space?

Well, at Layer we provide very tight security, which includes digital onboarding, identity verification and two-factor authentication. All this goes towards anti-theft, fraud and money laundering, which in the new era of online banking is the most important way to build customer confidence and loyalty. Of course, cybercriminals are always evolving in their sophistication too, so there is a big onus on companies like ours to never rest. That said, it is of utmost importance that African nations continue their work in passing digital privacy and data protection laws, so individuals have cast-iron rights to be protected in the first place.

What is the level of investment on digital banking in Nigeria by operators?

Well, that depends on how much drive a financial institution has to drive a full digital transformation for their customers. In the case of our work with UBA, we built their entire digital platform from the ground up, and this of course required significant investment. But one of the biggest things holding banks back is the perception that the process will take years and vast levels of investment. Following significant digital transformation, annual operating expenses can go in the other way, falling by up to 40% in the first year alone. So- it’s not about investment, it’s about the value that it brings, long-term.

What is the future of digital banking in Nigeria/Africa?

Well, this is what we’ve been discussing all along isn’t it. I can’t stress enough that the government issuing banking licenses to fintech startups and neobanks is opening up the field completely. The playing field is now so large, and suddenly the ability for non-traditional banks to enter into the market to provide financial services is huge. I believe that what we’re going to see is a lot of partnerships happening, whether it’s between traditional banks and mobile operators, fintechs and traditional banks, mobile operators, fintechs and traditional banks. We’ll see is all these parties coming together, and that’s where we come in. We can stand things up within just six months, whereas the traditional core banking systems to replace them can take three to five years.

The Central Bank of Nigeria recently launched a digital currency called eNaira. What is the prospect and challenges of eNaira in the short and long terms?

Well, yes- we played a role in this by building and deploying the eNaira wallet for Zenith, and because the Layer platform is built on Open architecture, the UBA team was able to add eNaira capability in record time. It’s still early stages for the eNaira, but I believe that due to the growth we’re seeing in other areas, it will be a huge success.

Roy Zakka is CEO and Founder of Layer, which facilitates digital transformation for traditional banks and financial institutions, enhancing the customer and back-office experience.

In its circular, BSD/DIR/GEN/LAB/12/070, to banks dated January 07, 2020 on the regulatory measures to improve lending to the real sector of the Nigerian economy, the Central Bank of Nigeria (CBN) directed banks to maintain a minimum 65% Loan to Deposit Ratio (LDR) with a further requirement that an average daily 65% LDR compliance be maintained by banks.
Since the issuance of the regulatory directive and in line with its key strategic objective of driving economic growth in Nigeria, Stanbic IBTC Bank has increasingly focused on the growth of its credit exposures to the real sector of the economy.
The focus and concerted efforts of the Bank’s management to ensure compliance with the regulatory directive of improving lending to the real sector of the Nigerian economy have been responsible for the growth in the risk asset portfolio for Stanbic IBTC Bank over the last two years.
The loan book increased by 18% from FY 2019 position of N556.4bn to N655.3bn as at 31 December 2020. The Bank also recorded an increased loan growth by 30% from the 31 December 2020 position to a gross risk asset position of N854.9bn recorded as at 30 September 2021. It is important to note that the risk asset growth of 18% and 30% recorded by the Bank in FY 2020 and as at Q3:2021 remain significantly higher than the industry average growth of 18% and 8% in FY 2020 and as at Q3:2021, respectively.
Consequent upon the significant growth recorded in the Bank’s risk asset growth in 2020 and YTD 2021, the Bank has remained compliant with the CBN’s daily minimum LDR requirement of 65% with a FY 2020 daily LDR average of 65.84% and 2021 YTD daily average of 69.86%. It is important to note that the Bank suffered no CRR debits by the CBN for non-compliance with the regulatory LDR directive over the period.
For good record, it is also noted that the growth in the Bank’s Cash Reserve Requirement (CRR) position from N369.0bn as at 31 December 2020 to N462.6bn as at 30 September 2021 has been largely on account of the monetary policy actions introduced by the CBN to rein in inflationary and exchange rate pressures in the economy.
In line with its price stability and monetary policy mandates, the CBN is saddled with the responsibility of managing surplus liquidity in the system and at various times over the period, the CBN has introduced special CRR debits to sterilize surplus market liquidity.
These special CRR debits which are over and above the minimum regulatory cash reserving requirement of 27.5% of customer deposit growth have indeed been responsible for the growth in Stanbic IBTC Bank’s total and effective CRR positions which stood at N462.6bn and 60.09% respectively as at 30 September 2021.
Notwithstanding the financial constraints arising from the sterilised liquidity from the CBN, Stanbic IBTC Bank remains very liquid and adequately capitalised with liquidity ratio and capital adequacy ratio standing at 96.2% and 15.7% respectively as at 30 September 2021 and above the regulatory minimum of 30% for liquidity ratio and 8% for capital adequacy ratio.

The final month of 2021 revealed a robust expansion in Nigeria’s private sector with the PMI improving to a 24-month high. Quicker uplifts in output and new orders as well as record inventory building were central to the improvement.
Despite the surge in new orders, firms added to their headcounts at the softest pace for 11 months but were still able to keep backlogs at bay.
Meanwhile, purchase cost inflation accelerated to a fresh series high, and for the fourth month running. Output price inflation followed suit, also quickening to a new survey peak in December. The headline figure derived from the survey is the Purchasing Managers’ Index (PMI.
Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration. At 56.4 in December, up from 55.0 in November, the latest expansion pointed to a robust overall improvement in business conditions.
Moreover, the latest quarterly reading was at 55.2, the highest since the final quarter of 2019. A key driver of growth was the quickest rise in new orders for over two years. Firms mentioned fruitful marketing efforts and a general improvement in domestic and international demand.
Subsequently, firms boosted output for the thirteenth month running, and at the quickest rate since August 2020. Subsector data revealed expansions across the board, although manufacturers recorded by far the strongest increase. Wholesale & retail, services and agriculture followed, respectively.
Despite robust expansions in output, firms added to their headcounts at only a slight pace. Panel comments suggested that whilst sales had increased, firms were able to keep up with demand leading to a marked reduction in backlogs.
Meanwhile, historically elevated rates of new order growth led firms to engage in stockpiling strategies during the month. In fact, inventories increased at the quickest rate in eight years of data collection. Buying levels also increased substantially, and at the fourth-most marked rate in the series.
As for prices, purchase costs rose at a survey-record rate for the fourth month running. Higher raw material prices, fuel costs and unfavourable exchange rate movements drove the increase. Favourable demand conditions allowed for costs to be passed on to clients at a record rate in December.
Finally, firms were optimistic for output growth in 2022 amid plans to broaden product offerings, increase advertisements and expand operations to new locations.