Experts have backed the notion as calls for Deposit Money Banks (DMBs) to increase their capital bases in order to better reflect the current state of the nation’s economy gain traction.
They did, however, issue a warning, saying that while the Bank is carrying out its recapitalization exercise, caution must be used to avoid forcing smaller banks into bankruptcy, as happened in 2005 when several banks were forced to merge due to lack of other viable options.
The experts recommended allowing smaller or regional banks to function within the system alongside the larger ones.
They approved of the Central Bank of Nigeria (CBN) Governor Olayemi Cardoso’s suggestion that the banking system would be recapitalized.
In his speech last week at the 58th annual bankers’ dinner hosted by the Chartered Institute of Bankers of Nigeria (CIBN), Cardoso hinted that the banking system will be recapitalized and provided a recipe for rebuilding the Nigerian economy, stabilising the country, putting an end to speculation, and restoring confidence in the foreign exchange market.
Attempting to justify their stances, the economists stated that, should it be put into effect, it will provide a channel for capital inflows into the economy, leading to a rise in foreign direct and portfolio investments.
They emphasised that as a result of the depreciated value of the Naira, the total assets of Nigerian banks have decreased in terms of dollars, with the total assets of all Nigerian banks valued at $132 billion falling short of the $169 billion total assets of the Standard Bank Group of South Africa.
Experts assert that capital is necessary to fund large-scale projects, particularly when the government hopes to achieve a $1 trillion economy in a few years. However, the planned recapitalization plan should differ slightly from the 2005 approach and focus more on incentives than coercion.
They emphasised that the banking industry is anticipated to be the driving force behind economic expansion and that, as a key component of the nation’s economic development, it must have sufficient ability to do so.
They noted that the current capitalization of the banks is insufficient to achieve the kind of economic growth the nation needs, particularly given that inflation and the ongoing depreciation of the Naira have already undermined the banks’ current capital sufficiency and may prevent them from stimulating the economy in a constructive way, necessitating recapitalization.
In an interview with the Nigerian Tribune, Dr. Chijioke Ekechukwu, Managing Director of Dignity Finance and Investment Limited, stated, “I had advocated and recommended for this increase of capital base at the beginning of this year.” This is a positive step forward for numerous reasons.
First of all, it will provide a channel for financial inflow into the economy, boosting portfolio and foreign direct investment levels.
Second, the depreciated Naira resulted in a decline in the dollar asset base of Nigerian banks. The $132 billion overall asset value of all Nigerian banks is less than the $169 billion total asset value of the Standard Bank Group in South Africa.
Thirdly, increasing bank capitalization will boost the amount of money available for loans, which will boost the economy. Recapitalization will also improve banks’ ICT capacities, enabling them to adapt to changes in the electronic industry. As a result, more jobs will be generated. The increase of capital base in this way has numerous additional benefits.
“The idea of recapitalization of banks is a welcome one,” said Professor Uchenna Uwaleke, Director of the Institute of Capital Market Studies at Nasarawa State University Keffi. Large-scale project financing obviously requires capital, especially when one of the government’s goals is for the GDP to reach $1 trillion in a few years.
But in my opinion, the tactic ought to diverge slightly from the 2005 methodology. Instead of using force, greater incentives should be used.
“A number of DMBs, particularly those in the FUGAZ category, are currently working to broaden their financial base.
The current tiered arrangements can be strengthened by the CBN using prudential rules. An excellent illustration is the application of the CAR, or the capital to risk-weighted asset ratio of a bank. As further incentives, the apex bank may apply differentiable cash reserve requirements and grant well funded banks priority access to the foreign exchange market.
“Smaller banks operating at the regional level shouldn’t be regulated out of business, for whatever reason.”
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Likewise, “The banking sector is expected to be the engine room of economic growth and as a major enabler of economic development in the country, and it must possess adequate capacity to do so,” stated Gbolade Idakolo, Managing Director, SD&D Capital Management Limited. With the current level of bank capitalization, the nation cannot grow to the kind of economic level that it needs to.
The need for recapitalization stems from the fact that inflation and the Naira’s ongoing depreciation have already undermined the banks’ current capital sufficiency and may prevent them from further boosting the economy.
To ensure the survival of small holding banks, the CBN should capitalise the banks on a regional, national, and worldwide scale.
The economy will eventually flourish if the recapitalization procedure is carried out correctly.
President Bola Tinubu recently appointed Dr Muda Yusuf, Director/CEO of the Centre for the Promotion of Private Enterprise (CPPE), to the Nigeria Customs Service (NCS) Board as a representative of the organised private sector. Dr Yusuf stated that the minimum capital requirements for the banking sector need to be reviewed in light of the significant loss of value caused by the depreciating domestic currency.
Under the heading “Capital Requirements for Banks,” Dr. Yusuf made the following partial statement in his “10 Points Agenda for the CBN Governor”: “The minimum capital requirements of the banking industry need to be reviewed in light of the considerable loss of value amid depreciating domestic currency.”
“The minimum capital requirements for banks were raised from N2 billion to N25 billion during the 2004 financial consolidation operation. The amount of capital that was revised to be required was $187 million. The same N25 billion today is only worth $32.5 million. This demonstrates unequivocally the extraordinary depletion of the banks’ capital foundation. Thus, it is now essential that the banks be recapitalized.
“It’s critical to guarantee that banks’ capital bases can sustain their current exposures for the sake of the financial system’s stability.”
According to financial analyst Aliyu Lias, who spoke with the Nigerian Tribune, the recapitalization effort is anticipated because, should the N25 billion in capital that was recapitalized be converted to dollars, it would demonstrate that the banks lack the strength and liquidity necessary to sustain the Nigerian economy.
They have no choice but to recapitalize in order to deal with the present circumstances. Furthermore, it needs to be methodical and give them time to prevent the people of Nigeria from becoming panicked.
Recall that certain banks combined during the Soludo recapitalization period. This time, banks might not want to combine, therefore the CBN could be smart or offer several bank classifications, according to Lias.
Dr. Yusuf stated, “It is imperative to deepen the financial intermediation role of the deposit money banks, which is their primary role in an economy,” while proposing suggestions for strengthening the financial system. The mobilisation of financial resources from the economy’s surplus end to its deficit segment is that responsibility. The private sector is still facing extremely difficult financial circumstances due to obstacles in obtaining and paying for credit.
As of 2022, Nigeria’s banking system credit to the private sector accounted for just 20.6% of GDP, compared to the sub-Saharan average of 28% and the global average of 145%. Furthermore, just 1% of the credit available in the banking system is accessible to small firms, which are estimated to account for 50% of the GDP. This suggests that there is still a significant gap between the banking system and the investing community, particularly with regard to small enterprises in the economy.
The estimated funding shortage for small businesses is more than N600 billion.
This irregularity must be fixed. All of these highlight the necessity of strengthening the banking system’s synergy and complementarity with other economic actors, particularly MSMEs.
The ratios of financial assets to GDP, deposit liabilities to GDP, and money supply to GDP are important indicators of the depth of the financial system. In comparison to other rising economies, Nigeria’s grade is still quite low based on these statistics. Deepening the financial system is therefore essential for stability.
“The proportion of non-interest income to bank revenue needs to be lowered. Two years ago, the ratio stood at 42.5 percent; given the various challenges facing investors in the economy, it would have increased by now. The percentage is less than thirty percent in the majority of developing economies.
The demise of financial intermediation in the economy is reflected in this income structure. As a result, this needs to be handled. Financial intermediation is the primary duty of the banking sector. The expansion of the economy is hampered when non-banking activities supplant the deposit money institutions’ ability to do financial intermediation.
Since Dr. Cardoso took over as CBN Governor at a pivotal juncture in the nation’s economic history, Dr. Yusuf said that reviving the FX market’s confidence may be the most pressing challenge facing him.
He noted that the economy is dealing with serious negative effects from a declining exchange rate, skyrocketing energy costs, raging inflationary pressures, a massive backlog of foreign exchange obligations that must be cleared, and debt service obligations that must be redeemed. He also pointed out that there is a serious crisis of confidence in the foreign exchange market that is fueling an unprecedented speculative onslaught on the naira.
He pointed out that these results are emerging at a time when the nation’s foreign reserves are significantly depleted.
