As the clamour for Deposit Money Banks (DMBs) to raise their capital base to align with the present economic situation in the country gather momentum, experts have supported the proposal…….CONTINUE READING>>>>>>
However, they cautioned that in implementing the Bank’s recapitalisation exercise, care must be taken not to muscle smaller banks out of existence like what happened in 2005 when some banks had no other viable option than to merge.
The experts advised that regional or smaller banks should be allowed to operate within the system along with the big ones.
They supported the Governor, Central Bank of Nigeria (CBN) Olayemi Cardoso’s hint of plans to recapitalise the banking system.
Cardoso, while speaking last week at the 58th annual bankers’ dinner organised by the Chartered Institute of Bankers of Nigeria (CIBN) gave a recipe on how to rebuild the Nigerian economy, restore stability, curb speculation, and also restore confidence in the foreign exchange market, hinting that the banking system will be recapitalised.
The economy experts, while trying to rationalise their positions, said if implemented, it is going to be an avenue for the injection of funds into the economy, thereby increasing foreign direct and portfolio investments.
They highlighted that with the devalued Naira, the asset base of Nigeria banks in Dollar terms has deminished as the total assets of all banks in Nigeria put at $132 billion is not up to the total asset of Standard Bank Group of South Africa that has an asset size of $169 billion.
According to the experts, capital is needed to finance big-ticket projects especially when the government is targeting a 1 trillion dollar economy in a few years’ time but the strategy of the envisaged recapitalisation should be somewhat different from the approach adopted in 2005, and should be more about incentives than coercion.
They stressed that the banking sector is expected to be the engine room of economic growth, and as a major enabler of economic development in the country, it must possess adequate capacity to do so.
They observed that the kind of economic growth the country needs to attain cannot be achieved with the present capitalisation of the banks, especially as inflation and the continous depreciation of the Naira has already weakened the present capital adequacy of the banks and may limit them to positively propel the economy, hence the need for recapitalisation.
Dr Chijioke Ekechukwu, Managing Director at Dignity Finance and Investment Limited in a chat with the Nigerian Tribune said, “I had recommended and advocated for this increase of capital base at the beginning of this year. This is a welcome development for many reasons.
“Firstly, it is going to be an avenue for the injection of funds into the economy, thereby increasing foreign direct investments and increasing portfolio investments.
“Secondly, with the devalued Naira, the asset base of Nigeria banks in Dollar terms diminished. The total assets of all banks in Nigeria at $132 billion is not up to the total asset of Standard Bank Group of South Africa with an asset size of $169 billion.
“Thirdly, capitalisation of banks will increase loanable funds and thereby will stimulate the economy. Recapitalisation will also increase the ICT capabilities of banks to adjust to expansions experienced in the electronic space. More jobs will be created therefrom. There are many more ancillary benefits of such expansion of capital base”.
On his part, Professor Uchenna Uwaleke, Director, Institute of Capital Market Studies, Nasarawa State University Keffi stated, “The idea of recapitalisation of banks is a welcome one. It goes without saying that capital is needed to finance big-ticket projects especially when the government is targeting a 1 trillion dollar economy in a few years’ time.
“But I think the strategy should be somewhat different from the approach adopted in 2005. It should be more about incentives than coercion.
“Some DMBs (especially many in the FUGAZ category) are already making efforts to increase their capital base.
“The CBN can use prudential guidelines to strengthen the present tiered arrangements. The use of the CAR (the ratio of a Bank’s capital to risk weighted assets) is a good example. The apex Bank can also use differential cash reserve requirements as well as preferential participation in the forex market for well capitalised banks as some of the incentives.
“For whatever it is worth, smaller banks playing at the regional level should not be regulated out of existence”.
Similarly, Gbolade Idakolo, Managing Director, SD&D Capital Management Limited said, “The banking sector is expected to be the engine room of economic growth and as a major enabler of economic development in the country, and it must possess adequate capacity to do so. The kind of economic level the country needs to attain in expected growth cannot be achieved with the present capitalisation of the banks.
“Inflation and the continous depreciation of the Naira have already weakened the present capital adequacy of the banks and may limit them to positively propel the economy, hence the need for recapitalisation.
“The CBN should however capitalise the banks on Regional, National and international basis so as to guarantee the existence of small holding banks.
If the recapitalisation exercise is properly implemented it will lead to growth in the economy on the long run”.
Dr Muda Yusuf Director/CEO, Centre for the Promotion of Private Enterprise (CPPE) who has just been appointed by President Bola Tinubu to serve as a member on the Board of the Nigeria Customs Service (NCS) as a representative of the organised private sector said the minimum capital requirements of the banking industry need to be reviewed in view of the considerable loss of value amid depreciating domestic currency.
In his “10 Points Agenda for the CBN Governor”, under ‘Capital Requirements for Banks’, Dr. Yusuf stated in part, “The minimum capital requirements of the banking industry need to be reviewed in the light of the considerable loss of value amid depreciating domestic currency.
“During the banking consolidation exercise of 2004, the minimum capital requirements for banks was raised from N2 billion to N25 billion. The revised capital requirement was an equivalent of $187 million. Today the same N25 billion is an equivalent of just $32.5 million. This is a clear indication of the phenomenal erosion of the capital base of the banks. Recapitalisation of the banks has therefore become imperative.
“It is important to ensure that the capital base of banks can support their current exposures in the interest of the stability of the financial system”.
Aliyu llias, a financial analyst told the Nigerian Tribune that the recapitalisation exercise is expected because if the last recapitalisation of N25 billion is converted to the dollar, it will show that the banks do not have the strength and the liquidity to support the economy of Nigeria.
“There is no choice; they must recapitalise to meet the current reality. More so, it must be systematic and there is a need to give them time to avoid panic from the Nigeria populace.
“Recall that during the Soludo recapitalisation era some banks merged. This time, banks may not want to merge, therefore the CBN should either be strategic or we have categories of banks”, llias said.
Dr. Yusuf while proffering solution to how to Deepen the financial system said, “It is imperative to deepen the financial intermediation role of the deposit money banks, which is their primary role in an economy. This responsibility entails the mobilisation of financial resources from the surplus end of the economy, to the deficit segment of the economy. Financial conditions remain very tight for the private sector amid challenges of access and cost of credit.
“Banking system credit to the private sector in Nigeria, as at 2022, was a mere 20.6% of the nation’s GDP, as sub-Saharan average of 28% and global average of 145%. Besides, small businesses which account for an estimated 50% of the GDP, have access to just about one percent of the credit in the banking system. The implication is that the banking system is still largely disconnected from the investing community, especially the small businesses in the economy.
“Financing gap in the small business space has been estimated at over N600 billion.
This anomaly needs to be corrected. All these underscores the need to deepen synergy and complementarity between the banking system and the economic players, especially the MSMEs.
“The key metrics of the depth of the financial system include the ratio of financial assets to GDP; ratio of deposit liabilities to GDP; and ratio of money supply to GDP. Nigeria’s rating on account of these ratios is still very low, compared to other emerging economies. Therefore, deepening the financial system for stability is very critical.
“There is need to reduce the ratio of non-interest income as a percentage of income of banks. The ratio was 42.5 percent two years ago and would have gone up by now given the numerous headwinds confronting investors in the economy. In most developing economies, the ratio is less than 30 percent.
“This income structure is a reflection of the failure of financial intermediation in the economy. This therefore needs to addressed. The core function of the banking industry is financial intermediation. A situation where non-banking activities are crowding out the financial intermediation functions of the deposit money banks is detrimental to the growth of the economy”.
Dr. Yusuf stated that restoring confidence to the forex market is perhaps the most urgent task before the CBN Governor, Dr Cardoso as he assumed the leadership of the CBN at a very crucial time in the country’s economic history.
He pointed out that there is a serious confidence crisis in the foreign exchange market fueling an unprecedented speculative onslaught on the naira, adding that the economy is grappling with severe adverse effects of depreciating exchange rate, soaring energy costs, ravaging inflationary pressures, huge backlog of foreign exchange obligations that needs to be cleared and debt service obligations that need to be redeemed.
He noted that these outcomes are manifesting at a time when the country’s foreign reserves have been substantially encumbered.…….CONTINUE READING>>>>>>
