Finance

US Bank collapse may affect financial inflows, jobs in Nigeria

US Bank Collapse May Affect Financial Inflows, Jobs In Nigeria

About $1.2 billion funding for Nigerian technology startups may be threatened and job losses are imminent as the ripple effects of the collapse of Silicon Valley Bank (SVB), the 16th largest bank in the United States of America (USA), begins to unfold, LEADERSHIP has learnt.

The technology world was in panic mode at the weekend following the folding up of the bank, making some tech startups in Nigeria begin to weigh the option of laying off staff as operating funds get stuck.

The Nigerian IT ecosystem is vibrant and had about 3,340 startups as of December 2022, which is almost five times than the second largest adult ecosystem in Africa, Kenya. Nigeria is home to five out of seven unicorns in Africa, making it the optimal talent development spot in Africa, which has been pivotal to Nigeria’s digital economy drive.

Regulators in the US last Friday closed the bank with the Federal Deposit Insurance Corporation (FDIC) taking over its assets and planning to settle insured depositors from today, Monday March 13, 2023.

SVB is a specialised bank that serves tech industries and startups, which in turn depend on Venture Capitals (VCs) for funding. However, a turn in the global economy had reduced cash flow from VCs.

Also, the bank had invested in treasury bonds, and as the Federal Reserve raised rates the bank announced that it made a $1.8 billion loss on the sale of a portfolio of securities and sought to raise a further $2.25 billion from capital markets to shore up its balance sheet; however, its shares cratered. 

By last Wednesday, investors started pulling out of the bank and customers tried in vain to withdraw their deposits from the bank, leading to its takeover by the US banking regulators.

The chief executive at General Partner of Future Africa, an early-stage venture capital firm, Iyinoluwa Aboyeji, who noted that SVB was one of the banks that knew how to bank tech companies, said many Nigerian tech companies banked with SVB for this purpose.

Aboyeji, who is also a co-founder of Andela and a former managing director of Flutterwave, said the foreign exchange challenges in the country had pushed Nigerian tech companies to commit their funds to foreign banks.

“Silicon Valley Bank was one of the few banks that understood how to bank technology companies. Most of our local banks don’t understand how to bank us and that was why there were so many tech companies that went to SVB. Most of the affected startups could have kept their money at home. The only challenge is that there are lots of regulations around restriction of foreign exchange.

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“For instance, VC companies, like the Y combinator accelerator, which help African Tech startups raise funds, were impacted, as 30 per cent of their portfolio companies were impacted and Nigerian tech startups were part of the portfolio companies of Y combinator accelerator.

“The bank was affected as a result of the high interest rate and the bank wasn’t playing with depositors’ money; the bank invested the money in safe instruments. Unfortunately, because of the way they communicated their solution to the impediment, investors panicked and therefore they all rushed to the bank to withdraw their money.

“In Nigeria, we need to have a conversation on how we can develop our own tech bank. The bank needs to work slightly differently from the way normal banks operate. Some of the frameworks being explored in the Nigerian international finance centre would enable the creation of such a bank. So, what the Nigerian government needs to do is to accelerate that process, so that we can protect our technology startups hub,” Aboyeji explained.

On his part, the co-founder and senior product and project manager, VPD Money, a fintech digital bank, Mohammed Adeleke, said SVB was one of the few banks that lent funds to tech startups.

“It is perceived as one of the safest bank all over the world. Although, their regulator said they are going to pay up to $250,000 starting from Monday, those who have more than that figure with the bank will have to wait till either someone acquires the bank or till when all its assets are liquidised to get their money.

“This will impact them, because operational funds become stuck, in that they will not have the funds to pay salaries, making them lay off staff. I know one such tech company. Meanwhile, in Africa, Chipper Cash is one of the biggest tech startups in Africa that is affected, in that it has some of its funds with Silicon Valley Bank. Recall that Chipper Cash laid off 12.5 per cent of its employees in December, 2022. We expect to see more layoffs with this new development,” he said.

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He added that with this new development, it will create panic among investors.

“There is panic with investors right now. For instance, a startup that wants to raise funds, investors will be scared to invest with that start up. Investors don’t know where to put in their money right now because they don’t know which one is safe. As an investor, you need to do your due diligence of the startup you want to invest your money with, and which bank the startup is banking with,” he said.

The director-general of National Information Technology Development Agency (NITDA), Inuwa Kashifu Abdullahi, revealed that Nigerian IT startups attracted $704 million in 2019, and $440 million in 2020 due to global COVID impact, and $1.7 billion in 2021 and $1.2 billion in 2022 from investors.

“Out of four million developers needed globally today, Nigeria can conveniently provide two million developers to the world, thus attracting about $40 billion from the value chain,” he added.

The NITDA boss further said the Nigerian IT ecosystem boasts of a large and growing economy, access to market, entrepreneurial culture, supporting government policies and access to talent, which have attracted about 30 per cent of the foreign investments coming to Africa.

Meanwhile, the head of financial institutions ratings at Agusto&Co, Ayokunle Olubunmi, whilst relating the SVB circumstance to the Nigerian banking industry, stressed the need for banks to diversify their assets and exposure.

“One of the first major things is about diversification. As a bank you need to be careful about your target market. The bulk of SVB business was to the tech guys and the tech world lives like a bubble as some of those businesses don’t really have basic fundamentals that are driving them. For banks in Nigeria, they need to be careful about their assets’ allocation. They should also try and see how to diversify and don’t get too concentrated on a particular sector,” he advised.

On his part, the vice president, Highcap Securities Ltd.,  David Adnori said: “The banking system in America is not the same as in Nigeria because if a bank is not doing well, and if it will not carry systemic consequences on the financial system in US, they will allow it to fail and then do the necessary thing.”

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Adnori added that “here in Nigeria, the Central Bank has the policy to prevent any bank from collapsing, otherwise, they will have allowed Skye Bank/Polaris Bank to fail.”

He explained that, after the global meltdown that affected the former Intercontinental Bank, Oceanic Bank and others, the CBN came up with a rescue plan that protected depositors.

According to him, the Nigeria economy is even more fragile than the US economy, but that it is unlikely for banks to fail in Nigeria, as the CBN had stepped up its surveillance to ensure that banks meet the minimum statutory requirement.

“In the US, banks love to game the system more than we do here: you see a lot of sharp practices coming more from the US. In all industries globally, the regulators are always playing catch-up. It is easier for the operators to try and manipulate, so it is not a matter of regulation alone. I am not saying regulation is lax, but at the same time it also has to do with the operators who need to see that if things go south, they will be liable and the business will be impacted.

“However, something that we also need to have at the back of our mind is that you can’t divorce what is happening in the general economy from what is happening in the banking industry. The tech space has been having issues over a couple of months with the downsizing, and then you see a bank that is hugely exposed to that sector coming down.

“If you look at what happened with the oil and gas exposure in Nigeria, it is the banks that forced the regulators such that the upstream, midstream and downstream sectors are seen as separate sectors and each person can give up to 20 percent of its loan book, which was what led to huge exposures. So it is easier for operators to manipulate regulators. There is no regulation that is strong or stringent enough that if the operators want to game it, they won’t be able to,” Olubunmi had earlier said.

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