Recapitalisation to spotlight banks’ commitment to private sector growth

The ongoing banking sector recapitalisation will berth bigger banks with larger capital base and capacity that can underwrite larger levels of credit, but their commitment to private sector growth will definitely be in focus after the exercise.

Data from the Central Bank of Nigeria (CBN) shows that banks’ credit to the private sector declined by 4.67 percent year-to-date (YtD) to N72.91 trillion in April 2024 from N76.48 trillion in January of the same year.

“Liquidity and credit to the private sector is a critical engine for driving the economy and that’s why the weight of the economy is on banks,” said Patrick Akinwuntan, former CEO, Ecobank.

He noted that Nigeria’s domestic credit to the gross domestic product (GDP) is low compared to that of other countries.

Read also: Explainer: What bank recapitalisation means for Nigerians

“In terms of percentage of credit to GDP within Africa, Egypt is 30.85 percent, according to the World Bank. In 2022, South Africa was 92.2 percent; China was 185 percent; the United States was 216 percent, but Nigeria was 14.79 percent,” he added.

The Central Bank of Nigeria (CBN) has set a timeline of 24 months for banks to comply with the new capital requirements commencing April 1, 2024 and terminating on March 31, 2026. The broad objective of the programme is to engender stronger, healthier and more resilient banks to support the government’s targeted $1 trillion economy by the year 2030.

In terms of volume of credit to the key sectors in Nigeria, the cultural sector got N5.8 trillion, which represents six percent of the total credit. Manufacturing sector saw N19.7 trillion, representing 21 percent of total credit, while the sovereign sector got N36 trillion, representing 37.4 percent.

The CBN raised the minimum capital base for banks with international authorisation to N500 billion. The apex bank also increased the minimum capital base for commercial banks holding national authorization to N200 billion, and for those with regional authorisation to N50 billion.

Merchant banks now have a minimum capital requirement of N50 billion, while non-interest banks holding national and regional authorisations are to adhere to new minimum requirements of N20 billion and N10 billion, respectively.

Analysts have said that banks’ race for capitalisation would significantly strengthen the banking industry and also allow them to invest in the real sector for economic growth.

“Recapitalisation would first impact the banks’ ability to weather the storm with our population surging and other challenges. We would need a strong solidified bank that can weather that storm. Also, there have been significant calls for investment in the real sector. We need the banking sector to be strong enough to be able to invest the funds that are required,” Femi Oladele, Public Policy Analyst at Meristem Securities Limited, said.

“Also, in consumer lending, we understand that we have been told that we need more than N1.8 trillion of consumer lending in Nigeria annually. We need a strong banking institution to be able to do that. So, we are looking at strengthening our banking sector which is significant and it’s good,” he noted.

Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, said: “As banks get more money, more credit will be available for the real sector of the economy. More banks are going to diversify into non-core banking sectors, but on the downside, he said the development will fuel inflation.”

He shed light on potential shifts in the banking landscape, including mergers, acquisitions, and the formation of larger banking entities.

“The recently announced upward review of the minimum capital requirements of Nigerian banks by the Central Bank of Nigeria further empowers banks to extend credit to the economy, especially with the productive sector,” Ken Opara, president, the Chartered Institute of Bankers of Nigeria (CIBN), said.

Opara said that before the last consolidation that took place a decade ago, one would need to have a consortium of banks to fund a major deal of transactions. Following that consolidation and recapitalization, we saw banks supporting mega transactions.

He said despite the significant impact of the real sector, access to credit for deals is relatively low compared to what is attainable in other climes.

Temi Sanni, group CEO, Emerging Africa, said that the recapitalisation will drive a lot of foreign investors into Nigeria.

“A better capitalised bank will signify stronger economy which will be attractive to foreign investors,” she said. “It will increase investor confidence in Nigeria’s financial stability, improve capacity and access to finance, create a competitive banking landscape and increase foreign direct investments inflows.”

Ike Chioke, CEO, Afrinvest West Africa, said recapitalisation will result in the emergence of stronger, healthier and more resilient banks, thereby supporting the achievement of a $1 trillion economy by the year 2030.

Bigger banks with larger capital base and capacity can underwrite larger levels of credit, he said, noting that the recapitalisation process will give room for capital importation.

“If banks aim to recapitalise by sourcing half of their required funds from the market, with an equal division between domestic and international markets, approximately N984billion or $820million would be generated from the global market.”

Muda Yusuf, chief executive officer, Centre for the Promotion of Private Enterprise, said Nigerian banks are adjudged to be generally healthy.

But this does not diminish the need for regulatory authority to ensure that this soundness and stability are preserved and improved upon, especially because of the recent macroeconomic headwinds, he said.

He said this could have informed the current policy of the CBN to review the capital base.