CPPE addresses the CBN’s recapitalisation of banks

The Centre for the Promotion of Private Enterprise (CPPE) on Monday said the proposed recapitalisation of banks should be done to minimise shocks and disruptions to the banking system and the economy at large.

In a statement signed by Muda Yusuf, director of CPPE, the think tank said the purpose of adequate capitalisation is to ensure the efficiency and stability of the financial system.

Mr Yusuf explained that capital adequacy measures the capacity of a bank to meet its financial obligations and absorb any shocks related to losses.

“It measures the financial soundness of a bank, ensures the safety of depositors’ funds, deepens financial intermediation, and enhances the capacity to support economic growth through the funding of investments,” he said.

Last Thursday, the Central Bank of Nigeria (CBN) announced an increase in the capital base for different categories of banks in the country.

The apex bank said the capital base of banks with international authorisation had been increased to N500 billion while that of national banks was increased to N200 billion.

The CBN noted that commercial banks with regional authorisation are expected to achieve a N50 billion capital base. In contrast, merchant banks are expected to shore up their capital to N50 billion as the minimum capital requirement.

The bank thereafter directed non-interest banks with national and regional authorisations to boost their capital to N20 billion and N10 billion, respectively.

In his statement on Monday, Mr Yusuf said the last major review of the minimum capital requirement was done in 2005, some 18 years ago.

“That was under President Olusegun Obasanjo, with Charles Soludo as CBN governor. But since then, the value of the minimum capital has been significantly eroded by inflation,” he said.

For instance, he said the official exchange rate in 2005 was about N130 to the dollar.

“This meant that the N25 billion for a national bank, for instance, was equivalent to $192 million. The naira equivalent today is about N250 billion. For the International Banking license, it would be about $384 million, an equivalent of about N500 billion. The reality is that the capitalization requirement has not increased materially in real terms, that is when adjusted for inflation.

“The real issue is that inflation has weakened the value of money over time which makes recapitalization imperative and inevitable. The essence is to ensure the safety of depositors’ funds, strengthen the stability of the financial system, deepen resilience of the banking system and reposition the bank to support growth,” he added.

He said reports from the Central Bank attest to the fact that Nigerian banks have good soundness indicators.

“Nigeria banks are adjudged to be generally healthy. But this does not diminish the need for regulatory authority to ensure that this soundness and stability is preserved and improved upon, especially because of the recent macroeconomic headwinds. This, perhaps, is what informed the current policy of the CBN to review the capital base.

“The proposed recapitalization of banks should be done in a manner that would minimize shocks and disruptions to the banking system and the economy at large.

“We commend the CBN for giving a timeline of 24 months for banks to comply. This would minimize disruptions and dislocations in the financial system. It would also ensure a smooth transition to the new capitalization regime for banks,” the statement said.

He further explained that with the current approach and timeline given by the CBN, the risk of bank collapse or hasty mergers and acquisitions should be minimized.

“It is also laudable that the current categorization of banks with differential capital requirements has been maintained international, national and regional. This is necessary to allow for inclusion and reduce the risk of dominance of the banking space by a few big banks,” he noted.

Depositors’ Interest

Meanwhile, Mr Yusuf said it is imperative for the CBN to assure depositors of the safety of their funds in the banking system, irrespective of the current level of capitalization of banks.

The think tank said it is important to sustain the confidence of the banking public about the soundness and stability of the Nigerian banking system, especially because of the perception and vulnerable risks of smaller banks.

“We implore the CBN to ensure minimum risk to shareholders and employees in the banking system, across the board. It is also imperative to guide against elevated concentration risks and the deepening of oligopolistic structure in the banking system.”

He said there are also concerns around the large interest rate spreads in the Nigerian banking system.

“The spread between deposits and lending rates is sometimes as high as 20 per cent, which is one of the highest globally. The tenure of funds in the banking system is extremely short.

“Over 80 per cent of funds are of one-year tenure or less, which explains the high level of assets and liability tenure mismatch in the banking system,” he said.

The think tank said access to credit by small businesses remains a major inhibition to economic growth and inclusion.

“Small businesses account for over 50 per cent of GDP but get less than 5 per cent of the credit in the banking system. According to IFC estimates, the financing gap in the Nigeria SME space is about $32.2 billion (over N40 trillion).

“De-risking the credit space for small businesses should be accorded high priority in the new dispensation. This is essential to boost growth, create jobs, and deepen economic inclusion.

“The apex bank should caution all players in the banking sector against predatory and other anti-competitive practices in the industry on account of the recapitalization policy,” he said.