• Tuesday, March 05, 2024
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CBN’s bank recapitalisation plan for $1trn economy raises questions

Cardoso defends MOC meeting postponement

The proposed bank recapitalisation announced by Olayemi Cardoso, the governor of the Central Bank of Nigeria (CBN), has left some industry stakeholders with questions, even as the move has been described as a welcome development.

Cardoso, who spoke at the Chartered Institute of Bankers of Nigeria’s 58th annual bankers’ dinner on Friday, said the CBN would be directing banks to increase their capital to serve a $1 trillion economy.

“We need to ask ourselves: Will Nigerian banks have sufficient capital relative to the financial system’s needs in servicing a $1.0 trillion economy in the near future? In my opinion, the answer is “No!” unless we take action. Therefore, we must make difficult decisions regarding capital adequacy,” he said.

Nigerian banks’ capital adequacy ratio, which measures a bank’s financial strength by using its capital and assets, declined to 11.2 percent in June 2023 from 13.0 percent in May, though still within the prudential requirement of between 10 percent and 15 percent.

A banking executive said on condition of anonymity that it is true that capital ratios are lower on account of recent devaluation as well as historically high unremunerated reserves, which has kept industry return on equity below inflation, but loan growth has also been moderate.

He said: “The pathway to attracting the capital we want into the banks goes through discontinuing some of the exoteric taxes like sterilising a third of bank’s deposits with zero interest or even penalising banks for falling short of 65 percent loan to deposit ratio when we already have 62.5 percent unloadable deposits (30 percent liquidity ratio and 32.5 percent cash reserve ratio).

Read also Analysts welcome CBN move to direct banks recapitalisation

“Same way the CBN is unwinding some of its stranglehold on its balance sheet and reserves, it has to let the banks breathe so that potential investors can forecast the future of the companies that they might be investing in.”

He said there’s a need to rebuild confidence with investors too, as the capital has to come from somewhere.

He said: “Of course, financial services are overburdened across the world due to sharply rising interest rates and that pressure is about to be felt by Nigerian banks. But no other country has tested the impact of 32.5 percent unremunerated cash reserve ratio with a sharp rise in interest rates and a call to raise capital.

“Yet I don’t see a universe where we return to the traditional CRR anytime soon – the government just can’t afford to give up the N2 trillion it saves in interest-free OMO (that’s what the CRR is). We can’t keep squeezing the oranges and hoping to excite investors in what is left; capital is scarce and Nigeria can be scary. We need to spice up banking stocks to raise the capital to achieve our $1trillion economy.”

A former commissioner of finance, said the determination of the CRR debits to banks by CBN needs to be more empirical and transparent.

He however said: “I don’t quite agree that both liquidity ratio and CRR cumulatively sterilises 62.5 percent of loanable deposits.

“Indeed if we assume without conceding that 62.5 percent of loanable deposits is sterilised, the question will be from what sources are the banks funding their loan books and consistently declaring their mouth-watering profits despite the downturn in the real sector of the economy?”

Someone familiar with the inner workings of the CBN said the idea of big capital for banks and the banks being the basis for “this pipedream of a $1 trillion GDP in a short period is frighteningly sounding like the famous “consolidation” which created paper tigers with fake and bubble capital that collapsed on us in just two years”.

“Hegel famously said history repeats itself. The first time as tragedy, the second time as farce. We should learn from history and not rush into repeating this mistake of being high on the idea that Nigeria has ‘mega banks’—safety before size. Pride and vanity come before the fall,” he said.

Another stakeholder said: “As much as one endorses the long overdue change in policy disposition away from ATM-type ‘development finance’ back to orthodox monetary policy, inflation control and price stability, and the aspirational statements towards a $1 trillion economy, Cardoso gave no hint as to how he will answer the big question of the day – where will he get the $20 billion – $30 billion that I suspect he needs right away to balance his accounts and give him (and the country) a breather?

“That being said, even if he somehow obtains the funds he needs so urgently, our path to a $1 trillion economy is very much rough and filled with potholes unless we can get our energy and transportation infrastructure base truly sorted out and away from being the disablers that they are today – issues that he can do little directly to affect.”

For Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, the recapitalisation will allow the banks to be well capitalised to continue to support the economy, given the recent changes in the economy.

According to him, it will also position the industry well to take advantage of the expected economic growth.

Read also CBN sets up FX framework, clears backlog with 31 banks

He said: “The recapitalisation process will attract foreign investors into the banking industry through foreign direct investments, therefore helping the country drive part of the much-needed long-term foreign currency investment into this important and attractive sector to stabilise the value of the naira.

“The banking industry will also use the opportunity to pitch to select foreign investors to drive the investments.”

Muda Yusuf, chief executive officer, the Centre for the Promotion of Private Enterprise, described the proposed recapitalisation as a welcome development because banks’ capital has been eroded.

He said minimum capital requirements of the banking industry need to be reviewed in light of the considerable loss of value amid depreciating domestic currency.

He recalled that during the banking consolidation exercise of 2004, the minimum capital requirements for banks was raised from N2 billion to N25 billion, saying the revised capital requirement was an equivalent of $187 million.

“Today, the same N25 billion equals just $32.5 million. This clearly indicates the phenomenal erosion of the banks’ capital base. 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 financial system’s stability,” Yusuf said.