With the news of the collapse of Silicon Valley Bank and Signature Bank, two United States banks known for funding most African and Nigerian tech startups, NCHETACHI CHUKWUAJAH writes on what the collapse of these banks portends for the tech ecosystem in Nigeria and Africa.
At a time the global economy seems to be recovering from the scourge of the coronavirus pandemic with financial institutions globally posting profits, it then comes as a rude shock that the 16th largest bank in the United States, popular for powering many African startups, could collapse.
On March 10, 2023, Silicon Valley Bank (SVB) announced its collapse following a bank run; making it the second largest bank collapse in the history of the United States and the first since the financial crisis of 2008.
SVB, with headquarters in Santa Clara, California, and worth $212 billion, was one of the top tech lenders in the United States. The bank had invested in the US government’s bonds following a boom in deposits from tech companies around the world that had provided tech solutions following the COVID 19 pandemic.
The value of the bank’s investment started depreciating as the US Federal Reserve, in a bid to rein in inflation, increased interest rates in 2022. In order to stay afloat following customers’ withdrawal of their deposits, SVB was forced to sell its bonds at a loss, raising concerns about the bank’s financial health.
The situation was further compounded when the bank announced plans to sell additional $2.25 billion new shares to shore up its balance sheet. Worried by this development, Venture Capital firms advised depositors to withdraw their funds from the bank. Within 48 hours of the “advice,” depositors had withdrawn so much funds that led to the implosion of the bank.
Spiralling effect
As though on cue, customers with Signature Bank withdrew $10 billion in deposits from the bank two days after the collapse of SVB, leading to the third largest bank failure in the US.
Signature Bank, one of the top banks in the US, had $110.4 billion as total assets at the end of 2022 with $82.6 billion deposits as of 2021. The 21 years old New York-headquartered bank ventured into crypto currency investment in 2018 and by 2021, 30 percent of its deposits were from crypto currency related businesses.
It is also heartwarming to note that the US financial authorities have assured of the security of depositors’ funds despite the bank failures, with the Federal Deposit Insurance Commission (FDIC) appointed as Receiver for SVB. The FDIC has transferred the deposits and assets of SVB to Silicon Valley Bridge Bank N.A, a full service bank operated by the Commission, to manage as it tries to market the bank to potential bidders.
Down and down
In a related development, the Swiss financial market was prodded on Sunday, March 19, as UBS, the country’s biggest bank, agreed to buy its failing rival, Credit Suisse, for three billion Swiss francs ($3.25 billion), which is 60 percent less than the bank’s worth as at Friday, March 17.
The Swiss National Bank, in a statement on Sunday, said the move was necessary in order to “secure financial stability and protect the Swiss economy” especially following the jitters being felt over the failure of SVB and Signature Bank.
USB is to pay an estimated 0.76 Swiss francs to Credit Suisse’s shareholders for stocks that were worth 1.86 Swiss francs as at March 17, while owners of $17 billion additional tier one bonds, said to be a riskier class of bank debt, will lose all their investments.
Credit Suisse is reported to have been losing investors’ and customers’ confidence over the years, recording its worst losses in 2022 since the 2008 financial crisis, reaching a record high in the third week of March as global interest rates soared due to inflation.
The bank’s shares lost 25 percent in the week leading to its collapse, despite investors’ efforts and an emergency loan of $54 billion by the Swiss National Bank to mitigate the situation. In like fashion as Signature Bank, depositors with Credit Suisse were reported to be withdrawing as much as $10 billion per day.
With bank failures, is the global financial market in jitters?
As much as the global financial market is connected and largely revolves around the US and the West, financial experts say the situation caused by bank failures will “be largely contained” given the US’ history of surviving and building resilience against financial crises.
Since World War II, the country has survived 13 financial crises, with the recent ones being the ‘Great Recession’ of December 2007 to June 2009 and the COVID-19 pandemic. For each of these crises, the US government has had to inject millions of dollars in funds as stimulus.
Mr Ikemesit Effiong, Head of Research at SBM Intelligence, in a telephone interview with Nigerian Tribune, opined that the bank failures do not portend a global financial crisis as the situation affects only a few financial institutions in a segment of the market (tech and crypto currency) and not indicative of systemic failures. He however, added that it could “add an extra layer of pressure” on already heightened economic stressors like global record-high inflation, job losses, cost cuts, lingering effects of the global COVID-19 pandemic, among others.
Dr Muda Yusuf, the Managing Director/Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), told Nigerian Tribune that this is “because of the strategic position that the US economy and financial system occupies and the exposure of other economies to the US banking system in terms of bonds, investment instruments, etc.”
Should tech startups in Nigeria and Africa be worried?
A 2022 report by Disrupt Africa, a research platform focused on African tech startups titled, “The Nigerian Startup Ecosystem Report 2022,” disclosed that between January 2015 and August 2022, about 383 Nigeria’s tech startups raised a combined $2.068 billion in funding.
The research platform noted that the amount was more than that raised by any country across Africa within the same period. It also ranked Nigeria among Africa’s ‘big four’ in the tech startup ecosystem alongside Egypt, Kenya and South Africa.
As at February 2023 when two Nigerian startups won $300,000 at the LEAP tech conference pitch in Riyadh, Nigeria accounts for $976 million of the $3.3 billion worth of investments attracted into Africa. This means Nigerian startups make up 28.4 percent of the continent’s total funded ventures, having received 29.3 percent of total investments in Africa.
Despite witnessing an unfavourable 2022, Nigerian tech startups raise about $1.3 billion in investments, a figure that is lower than the $1.5 billion the sector recorded in 2021.
With this amount being raised by African and Nigerian tech startups, it becomes worrisome the impact the collapse of SVB and Signature Bank could have on them given that many Venture Capital firms like Quona Capital, EchoVC, Future Africa, Ajim Capital, Volition Capital and 4DX Ventures, also banked with SVB, although some have expressed confidence of remaining with SVB.
Already, Chipper Cash, a fintech startup that facilitates cross-border payments for customers in five African countries, the US and the UK, including crypto trading, announced that the collapse of SVB affected it.
As at March 15, there were reports that the startup is considering a sale, one year after it raised $150 million in a Series C extension round that placed its value at over $2 billion. With two of its investors, FTX and SVB, shutting down within a year as a result of withdrawal crunch, Chipper Cash has laid off over 150 employees within a three-months period of between December 2022 and February 2023.
In analysing this, Mr Effiong noted that Venture Capital firms investing in Nigerian and African startups are being affected by the follow-through effect of happenings in the American tech ecosystem, leading to streamlining of operations being witnessed within the Nigerian and African tech startup space.
He said the US banks’ collapse will accelerate the impact on the Nigerian and African space in two ways. “A lot of these Venture Capital firms will become more inward focused because they are trying to ensure the value of their investments back home and that enables them to make forward-thinking investments in other markets including Nigeria and that would mean that less Nigerian startups will be able to raise and those that are be able to raise, will be raising much lower amounts than we have seen in recent years.
“The second bit is that for those investors who are already invested in Nigerian tech startups, they would become more hands-on in terms of the demand they make from their tech partners down here. So, we would have a situation where Nigerian tech startups will come under increasing pressure to deliver returns and value on ever shorter timelines and that would put more pressure on the ecosystem. So, a lot of the job losses, the tech valuation reductions as well as a reduction in the value of the amounts that are raised by Nigerian tech startups, all of that will become the new normal from here on as that correction continues to happen within American tech.”
However, Dr Yusuf and Dr Godwin Ibe, a lecturer in the Department of Banking and Finance, University of Nigeria, Nsukka, are of the opinion that the scale of exposure of Nigerian tech startups to these banks in the form of investments will determine the extent of impact.
“It is not so much of a tech startups issue. I think it is more about the soundness of the financial system itself, both domestically and globally. For financial operators including those in the fintech space, depending also on the level of their exposure to some of these global banks, if there is a lot of exposure in terms of investments in bonds and deposits with some of those banks and those banks go under, then there could be an issue and that is not restricted to the fintechs, it also applies to our regular banks,” Dr Yusuf said.
Dr Ibe told Nigerian Tribune that this could be a potential clog in the wheels of growth in Nigerian and African tech startup space. “Basically, it is going to send the wrong signal – don’t give loans to these people. The signal effect is that most of the financial institutions in Nigeria will now think that since these two institutions (SVB and Signature Bank) were involved in funding people going into the green economy and things related to fintech, it will snowball to not giving loans to these categories of startups.
The need for tighter bank regulations
Following the news of the collapse of both US banks, the Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, called for tighter regulations for banks, especially in Africa.
Emefiele, while attending the opening ceremony of the 2023 African Central Bank Conference in Johannesburg, South Africa on Wednesday, March 15, said African central bankers and financial sector regulators must be vigilant in their roles to prevent any run on banks within their jurisdiction.
He maintained that the guidelines being adopted by the CBN in Nigeria was necessitated by the need to protect depositors’ funds while promoting transparency in the financial sector.
However, the financial experts opine that though banking crisis may not be completely eliminated, the scale, effects and frequency of such occurrences could be limited. They also agree with Emefiele on the need to enforce stricter, tighter, proactive and streamlined regulations for banking and the financial sector, especially for emerging markets like tech and crypto currency investments.
Mr Effiong noted that some of the regulations has to do with “tried and tested tools that we have had for decades in terms of managing the financial system, very tight overall banking supervision, encouraging financial institutions to accurately report the state of their financial affairs, curtailing the growth of institutions so that they are not so big and so indispensable that any adverse developments within those institutions portend instant negative effect to the large part of the economy.”
Dr Ibe called for going back to the basics of banking. He said, “There should be a domestication of regulation of crypto. Also, in giving out loans, there is a need to look at the fundamentals of those institutions. We should also look at the fundamentals for giving out credit which involves competence, character, collaterals that are valuable. We must go back to the core of banking in order to survive this new wave.”
Like Emefiele, Dr Yusuf said that banking and financial crises all over the world are as a result of poor regulation, which should take cognisance of such things as level of non-performing loans, capital and liquidity adequacy, lending policy, exposure to certain risks, among others.
“The only way to forestall a future recurrence is to strengthen regulation; there must have been some lapses or shortcomings in regulation. That is why banks all over the world are highly regulated because of these kinds of issues. Normally, there are prudential guidelines which are there to ensure the stability of the banking system and they require a very effective regulatory framework. So, if there are lapses with regulation, these kinds of things could occur,” the CPPE boss said.
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