Why are BDCs insanely profitable businesses?
And why the CBN's latest policy won't change that
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It’s been a week full of activity; so let’s get right into it.
PiggyVest’s Savi. ng’s acquisition and the VFD connection
“2020 was an incredible year for PiggyVest, we saw tremendous growth even in a pandemic year — we paid back N90 Billion to our users in the course of the year.” - PiggyVest
In 2015, someone tweeted a picture of how she saved N365,000 using what we plebs call a kolo — piggy box to you bougie people. Then some other people looked at the tweet and said, “Gee, there’s a business idea here.” You might think I’m making it up, but that’s the PiggyVest origin story. In 2016, its first full year of operation, it helped users save what we can now call a paltry N21 million Naira. To go from there to paying back N90 billion to users in 2020 alone is (insert your word of choice here). I think it’s just insane.
Today, the startup has a microfinance bank licence and does more than just helping save those millions you people have. Yesterday, the company announced that it was acquiring a little known startup that lets you save money, called Savi.ng — it’s interesting because we don’t see many startups buying other startups in Nigeria.
Why did PiggyVest acquire Savi.ng? According to this TechCabal report, the deal is “more of a team acquisition” as PiggyVest consolidates its status as the market leader. The report also says we can expect more purchases soon.
But there’s a little detail that’s important in Savi.ng’s acquisition: Several reliable sources told me that the acquisition is linked to the fact that VFD bought a 12.5% stake in PiggyVest. One of the terms of that purchase was a non-compete clause, basically meaning that both companies cannot have products that directly compete. So it made sense that PiggyVest should buy Savi. ng, the smaller savings product owned by VFD; two members of Savi.ng’s team will join PiggyVest as a result.
Bottom line: PiggyVest seems to have won the market as far as savings is concerned, but they’re well aware of how quickly things can change. This decision to acquire talent that can help them do more stuff is an excellent sign for the future.
Speaking of signs for the future, here’s one that’s not very good….
CBN, BDCs, bans and...how does all of this even concern me?
On Wednesday, the CBN governor, Godwin “don’t teach me my job” Emefiele made an important pronouncement: the Central Bank would no longer sell $$$ to Bureau De Change (BDC) operators.
Some background: if you want to buy $$ in Nigeria, there are as many as three different prices (a.k.a multiple exchange windows) depending on who you’re buying from and how long your leg is. Big man Liko will get $$ from the Central Bank at maybe $1 = ₦380. Suppose you’re an importer/businessman and you fill out the appropriate documentation, in that case, you will get $$ at a rate for importers (a.k.a NAFEX rate) which is $1 = ₦411. These are the two “official” channels, but there’s also the “black market” where BDCs operate.
The Almighty Black Market:
Since 2016, the CBN stopped giving $$ to people who want to import things like Rice, margarine, kitchen utensils etc.
There are 42 banned items the CBN will not give you $$ for
At one point, it also banned those looking to pay school fees abroad from getting $$$
Everyone who needs $$ for these banned items goes to the “black market,” an extensive network of BDC operators who — wait for it — each get an allocation of $20,000 per week from the CBN. The CBN also dictates that the maximum markup the BDC operators can charge (a.k.a spread) shouldn’t be more than ₦2.
So when BDCs get these allocations of $20,000 at discounted rates — let’s assume ₦411 per dollar, they’re supposed to not sell it at more than ₦413. But in reality, they sell it to people at around ₦486, thereby making lots of money — this is the real reason why the CBN receives 500 requests for BDC licences every week; it’s an insanely profitable business.
Yet, this process of simultaneously buying and selling the same asset at different markets so you can make profits from the tiny price difference a.ka arbitrage is only a symptom of the problem. As Stears brilliantly explains in this article, it is not the problem itself.
Sadly, the CBN under Emefiele has hyper-focused on the symptom instead of the real problem: we are not creating policies that attract $$$ that come in through foreign investments. And until we do, there’s no short-term fix for where we have found ourselves.
So, the CBN is taking the easy route of stopping the sale of $$$ to BDCs, a move that it has tried before with very little success.
“The definition of insanity is doing the same thing over and over again, but expecting different results.”
Why didn’t this strategy work in 2016? The banks could not meet the demand from the public, so people turned to BDCs, yet, most importantly, the Banks ended up selling the $$ they had to the BDCs anyway. It created a situation where the black market rates shot up because the BDCs then added high premiums to the already high cost of getting $$ from the banks.
Why it won’t work again this time in 2021: “The interim solution of substituting BDCs with banks is hardly going to achieve much. You are virtually handing over the yam barns to goats to secure. In the end, there will be no yams nor goats.” - Bismarck Rewane.
Now, how about a change of pace to a lighter topic?
Abeg’s big splash
Hoping to become Nigeria’s Cashapp, “Abeg” is making a splash on social media, with influencers like Don Jazzy using the app to do giveaways. Abeg is also one of the two headline sponsors of Big Brother Nigeria, the country’s biggest reality TV show. If you believe the speculation, it costs somewhere around $2 million to sponsor the show, which is a lot of money.
Quite a few people on social media have asked where the money is from. I have seen a few comments suggest that it’s a money-laundering exercise — let’s hold our horses, people. Like most startups, Abeg’s funding will have come from the founder’s funds/angel investors/fundraising. A few sources told me that the startup, which PiggyVest has some stake in, spoke to a handful of investors this year.
There are questions to be asked of Abeg, like every other startup, around things like its business model and what the long-term goal thinking is, but for now, let me too enjoy giveaway - Abeg send money for beer on my abeg handle $Mosco. And whoever sent me ₦5 during the week to say thank you, I hope I run into you this weekend -_-
Enough about my money, let’s talk about someone else’s….
Airtel kicks off earnings season with $142m profit in Q2
I’m sometimes guilty of getting carried away with earnings reports, but for Airtel Africa’s financial report for the second quarter of 2021, I’ll only stick to the highlights:
Find the full financial report here. Next up: Jumia’s Q2 report on August 10; let me know in the comments if you’d also like to see the highlights of that report as well.
That’s enough reporting for one day, people. Here’s that section where I pretend I read deep and interesting things during the week.
What else I’m reading:
There’s a lot of talk about the importance of mental health at the Tokyo Olympics and the conversation is happening here too: Burnout, mental fatigue and talent drain are a threat to Nigerian startups
Nigeria’s “super cop,” who has been accused of human rights abuse for years is now wanted by the FBI in connection with now convicted fraudster, Hushpuppi.
Nigeria Suddenly Bars Sale of $5.7 Billion to Money Traders
Synopsis Of The New CBN Regulatory Regime For Payment Service Banks
Is regulatory license repurposing the engine of the fintech revolution in Nigeria?
And in true irony, a Twitter user who teased about creating a startup that's the opposite of PiggyVest — JiggyVest, which helps you flex your money instead of save — is now building the product.
Also, if you’re looking to splurge this weekend, Shell is trying to sell its Shell petroleum Development Company of Nigeria Limited (SPDC), per this Twitter user.
And here’s a juicy bonus:
Food inflation in two images:
Splurge on Shell?? 🤣🤣🤣 Mosco!
This BDC ish doesn't look like it will end well.
Please can you do a report on how companies like Friesland WAMCO and Promasidor make profit in Nigeria with the whole debacle of backward integration.