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Banks’ Recapitalisation And The Economy



The Central Bank of Nigeria (CBN), recently, rolled out measures that are expected to stimulate the financial system and, in the process, boost the nation’s economy. The Governor of the apex bank, Godwin Emefiele, put these measures in perspective when he unveiled his five-year policy plans, which included the recapitalisation of the banking sector.

The blueprint, presumably, will make the banks to play more active role along a charted path that will stimulate growth in the economy. The intendment of the policy thrust is that within a five year period, the CBN under the present leadership, will pursue an economic agenda that will make the economy grow by double digits through targeted programmes aimed at boosting output.

To make this realisable within the given time frame, it is understandable that the CBN is working out processes that will meaningfully involve the Deposit Money Banks (DBMs) to a level that will boost credit to the real sector as well as the creative and education sector.

The policy that engineered the present capital base of N25 billion and which came into effect in 2004 under ex-CBN Governor, Prof Chukwuma Soludo, was considered radical at the time but obviously no longer sufficient to drive the economy in the direction that the present economic realities demand.

We recall that in 2004 when the banks recapitalisation last took place, the value of a dollar to the naira was, on the average, about N100. This meant that the N25 billion capital base of banks when translated into the dollar was about $250m. However, due to the drop in the value of the nation’s currency which now exchanges for N360 to the dollar, the value of N25 billion is just about $75m. The period between 2004 and now has cut the value of the capital of each DMB by about $175m. Based on the number of DBMs in the country which stands at 20, the total value of the capital base may have been eroded by about $3.5bn.

This newspaper commends this policy which, with the cooperation of all stakeholders, will strengthen the capacity of banks to support the economy especially with regard to large projects. It will also, hopefully, be beneficial in bolstering the capacity of the banks to withstand macro-economic shocks.

The last recapitalisation exercise that specified a minimum of N25 billion closed on December 31, 2005, and subsequently, minimum selective amounts were specified for market segments for international banks, DMBs and merchant banks. Back then in July, 2004, when the capital base of the banks was increased phenomenally from N2 billion to N25 billion, the minimum was said to have been left too long in view of the dynamics of the banking market in Nigeria and steady internationalisation of transactions in both the money and capital markets. Therefore, financial analysts claim that a review of the minimum capital requirement for the banks’ categories some 14 years after was, not only timely, but advisable. Within that time span, the economy has expanded, raising the value of financial and commercial transactions. The banks today are dealing with much larger transactions than they did 14 years ago. They are also assumed to have the capacity to do more a condition that makes recapitalisation inevitable.

A recent Financial System Stability (FSS) report of the CBN revealed a declining assets of Nigerian banks and the need to strengthen their fundamentals in the critical areas. According to the report, the total assets and liabilities of the deposit money banks had declined substantially in recent years. The report also raised concerns about the liquidity of many of the banks due to Non-Performing Loans (NPLs). The banks’ NPLs increased to N8.17trn in the 2018 fiscal year.

However, we share the cautious optimism of industry operators that the Emefiele plan will, invariably, promote financial stability, provide bigger banks a more sturdy backbone to perform assigned financial intermediation functions. When banks have the required capital base, it is assumed that they will have the leverage to be enlisted among the big banks and acquire the capacity to withstand shocks that may, from time to time, arise.

In our opinion, and given that all variables play out as planned, the policy can also help in the global ranking of banks. At present, no Nigeria bank is among the best 500 in the world. Newly recapitalized banks will, in the calculation of industry experts, be able to lend to private sector and also make it easier for CBN to perform its regulatory duties effectively and efficiently.

However, we suggest that the process must be properly thought through to ensure minimum shocks on the financial system. Care should be taken not to trigger a confidence crisis in the banking system. We, similarly, advise that the process should be gradual and done in a coordinated manner.



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