Financial Services Cluster in Nigeria

Topics: Economics, West Africa, Africa Pages: 6 (1780 words) Published: June 27, 2013
Assessment of the Business Environment in Nigeria


Factor Conditions: Despite Nigeria’s substantial natural resources its infrastructure is inadequate, particularly its road and electricity networks, which are a significant obstacle to economic growth.

Only 30% of the population7 has access to electricity and only 31% of the road network is paved. Shortcomings in operations and safety have given both the ports and air space a reputation as the most unsafe in the region. Although insufficient, the government has made some progress in addressing these issues. For example, a legal framework was set for private-sector investment in the energy sector; however progress in building new generation plants has been slow. In 2005, US$150m was set aside to improve the airports and new minimum capital requirements for airline companies were set to improve standards. Virgin Nigeria, a privately owned airline was launched to replace the defunct Nigeria Airways. In the telecoms sector, state controlled Nitel was privatized and two new mobile telephony licenses were issued. As a result, subscriptions rose from 450,000 in 2001 to 24.4 million in 20068.

Besides infrastructure, corruption is also a major concern. Nigeria has been ranked in the bottom 20 most corrupt countries in the world9 and despite the prosecution of several high-profile government officials, corruption remains high and it undermines the credibility of the business sector. In terms of human capital, the country has a labor force of 48 million10. The labor is largely unskilled but a core of highly skilled workers exists. The trade union movement (Nigeria Labour Congress), once a powerful force, has been weakened by rising unemployment and poor leadership. In 2005 the government introduced legislation to end the NLC’s monopoly. Nigeria generally has good relations with neighboring countries and is a member of the Economic Community of West African States (ECOWAS). Although integration of the regional economies is slow, Nigeria has the potential to become the financial services hub for West Africa.

Demand Conditions: The country has the largest population in Africa. An important feature of the demand is that it is concentrated in Lagos (10million) and Abuja (2 million)11. This concentration of demand is facilitating the formation of different clusters (i.e. financial services and manufacturing related businesses) in these two cities. A key concern however, is that most of the demand is unsophisticated due to low incomes and high poverty levels.

Context for Firm Strategy and Rivalry: Due to reforms in the banking sector, the country has an advanced financial system relative to other African countries. . However, the cost of finance is still high and access to medium to long term finance is limited. Recently, the government drafted a national tax policy to streamline the tax system and curb endemic tax evasion, encourage investment and boost non oil revenue. The policy aims to move towards greater reliance on indirect taxation and recommends a gradual increase in VAT from 5% to 15% and a reduction in company income tax from 30% to 20% by 2009. Certain sectors and regions such as export processing, gas, mining, pioneer enterprises, agro-industrial ventures and infrastructure are favored with tax incentives, tax holidays and accelerated capital allowances. However, major challenges remain. Several sectors are dominated by monopolies and there has been slow enforcement of intellectual property rights. The incremental cost disadvantage of operating in Nigeria is thought to be about 25%, mainly due to red tape, customs delays and power shortages.

Related and Supporting Industries: A critical number of local suppliers exist, but according to the findings from the Business Competitiveness Index study12, the quality of service is still low. While this is a concern for the manufacturing sector, it is not a pressing concern for the financial...
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