As assets under custody surge in Nigeria, custodian banks are coming under increased scrutiny amid fears of gaps in the regulatory framework governing them.
The major issue that industry sources who BusinessDay spoke to are concerned about, is the lack of skilled manpower to monitor, supervise and regulate the banks who serve as major gateways to the inflow of foreign portfolio investment, among others, in their custody businesses in Nigeria.
A custodian is a financial institution responsible for safeguarding a firm or individual’s financial assets or securities, such as stocks, bonds, commodities and currency (cash).
Custodians may also arrange settlement of any purchases, sales and deliveries (in or out) for such securities and currency. Clients may include banks, insurance companies, mutual funds, hedge funds and pension funds.
The size of the assets under custody in Nigerian banks is now in the neighbourhood of N10 Trillion (about $62bn); however sources say this is not very visible to the Central Bank of Nigeria (CBN) because the assets are not reflected in the balance sheets of the banks.
These balances include the N4 trillion in pension industry assets and are growing rapidly as investment funds flow more towards the Emerging and Frontier markets and as pension assets grow monthly via existing and new contributors.
“The assets under custody in Nigerian banks would soon outpace the total deposits in the same banks but are not being actively monitored and supervised like the mainstream banking business and this would be due mainly to the skills gaps in custody business in Nigeria, and specifically at the CBN and SEC,” said one asset manager who didn’t want to be identified.
Custodians make money by earning fees from rising asset values and transaction volumes.
However global custodians have been sued by pension funds since the financial crises of 2008 for allegedly over-charging them on FX trades and losses incurred on the reinvestment of cash collateral.
Key concerns for the industry in Nigeria include whether the risk management practices of Nigerian custodian banks are adequate , and their ability to cope with a sudden withdrawal of vast cash deposits in the event of a financial crisis.
Sources say there is currently no unit or department at the CBN whose role is to specifically supervise the custody business in Nigerian banks, either as a stand-alone department, or a unit under Banking Supervision.
Two calls BusinessDay put through to the CBN’s corporate affairs department seeking clarification went unanswered, while an email sent to the bank’s media relations bounced back as undeliverable.
Sources also say that although the $62bn in assets under custody is sizable by Nigerian standards, it has room to grow and is not yet scratching the surface of the country’s potentials, as reforms of the Nigerian money and capital markets, attract further investor interest.
Pension assets which currently make up 40 percent of assets under custody in Nigeria are growing at a rate of $2.5 billion (N400 billion) a year; meanwhile foreign investment under custody in Africa approached $500 billion at the end of 2013, with only 1 percent of that domiciled in Nigeria.
Some Nigerian banks that act as custodian banks include Standard Chartered Bank, UBA, FBN Holdings and Stanbic IBTC.
Stanbic IBTC, the largest custodian bank in the country had custodian assets under management that “crossed the N2 trillion-mark at the end of 2012,” according to Sola David-Borha, Chief Executive Officer of Stanbic IBTC holdings in a statement to investors, in the company’s 2012 annual report.
The CBN should attract the few custody experts and practitioners in the banking sector to assist them in training CBN staff to adequately regulate the burgeoning custody business in Nigeria, said another source.
“The importance, size and risk potential of custody business to our banking sector is too big to emphasise,” he said.
By: PATRICK ATUANYA
