• Tuesday, May 28, 2024
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Bank directors urge CBN to scale recapitalisation with int’l exposure

Rate Hike or Hype? A ‘NeverEnding’ Story

Mustafa Chike-Obi, chairman, Board of Bank Directors Association of Nigeria (BDAN), has said that banks recapitalisation requirement should be to the degree to which it operates internationally.

He said banks with a minimal international exposure should not be required to raise the same amount as banks doing vast international business.

“If you’re doing 10 percent of your business internationally then you need 10 percent increase in capital, if you’re doing 50 percent then 50 percent increase in your capital,” he said.

Read also: BDCs support CBN’s new rule on foreign currency as collateral for naira loan

He said this during an interview on Channels TV on ‘Impact of CBN monetary policy on Nigeria’s economy’, on Wednesday.

Last month the Central Bank of Nigeria (CBN) announced a ten-fold jump in minimum capital requirements for banks, two decades since the last exercise.

The minimum capital requirement was jacked up to N500 billion for those with international authorisation, N200 billion for commercial banks with national authorisation, and N50 billion for those with regional authorisation.

Eight banks with international operations are expected to raise their capital requirements of N500 billion, which includes all tier one banks, Fidelity Bank, FCMB and Union Bank. They all currently require over N200 billion to meet this requirement.

Choke-Obi said that it was the directors’ responsibility to raise capital but they were not consulted. He argued that asking banks to raise N4trrillion in the next two years was a difficult task.

“Given where the risk-free rate is, around 30 percent, you require about 35-40 percent return on capital to invest in banks. That’s a little more risky than treasury bills,” he said.

“So, they have shrunk the banking space both in terms of people that can afford those interest rates and the amount of money that and the amount of money that’s available for the deposit,” he said.

The chairman said that the banking business would shrink in the next couple of years, “and in that shrinking business you want people to bring N4trillion worth of capital. It’s a bit of a contradiction.”

Paul Alaje, an economist, said on the programme that recapitalisation was important.

“I cannot say that banks were doing as well as they used to. Maybe the top 10 banks might be doing fairly okay but most of the other banks, it’s important for them to recapitalise,” he said.

On the hike in interest rates by 600 basis points, Alaje said the increase was too much.

Read also: Dollar supply seen rising on CBN’s new directive

After the initial 400 basis points increase to 22.75 percent, the Monetary Policy Committee (MPC) last month raised the Monetary Policy Rate (MPR) to 24.75 percent, representing a 200 basis points increase.

“I’m not saying the CBN shouldn’t have increased the MPR, but 600 bps in five weeks is too much. The cost of hiking is more than the benefit of the increase,” he said

Similarly, Abdulrasheed Yerima, president Nigeria Association of Small and Medium, said that the rate hike would affect investment in the MSME ecosystem.

“It will affect start-ups trying to start new businesses; it will also affect expansion,” he said.

He noted that the government should have waited for MSMEs to adjust to this high cost of energy and high cost of transportation.

“They should have allowed the naira to stabilise because some of us import our raw materials,” Yerima said.