Wunmi Bewaji, a Leeds-trained securities and financial regulation expert, has urged the Central Bank of Nigeria (CBN) to prioritise the conduct of stress tests in the banking sector and not to adopt an arbitrary figure in its proposed recapitalisation moves.
Yemi Cardoso, the CBN Governor had last year hinted at capital raise for banks to put them in good stead for the N1 trillion economy envisioned.
Speaking to InsideBusinessNG on the recent report by Ernst and Young, an audit firm, Wunmi said that conducting a stress test before the proposed recapitalization across respective categories of banks will reveal how the banks would perform in crises, stimulate the economy and their ability to withstand market shock. He noted that although the recapitalization exercise was carried out years ago, a lot of changes have taken place in the economy and the banking sector.
Earlier in the week, Ernst and Young, in its report titled “Navigating the Horizon: Charting the Course for Banks amid Plans for Recapitalisation”, noted that if the apex bank raised the capital base of commercial banks in the country by 15-fold from the current N25bn, only seven banks may survive.
That is no fewer than 17 out of the existing 24 Deposit Money Banks may be unable to meet the Central Bank of Nigeria’s capital requirement if it is increased from its current N25bn.
According to the report, “The recent plan by the CBN to increase the capital base of banks could again lead to M&A activities but not as widespread as was the case in 2004/2005 given the relatively solid financial positions of the banks today as well as the occurrence of several M&A activities in the banking sector over the past 10 years.
“While the CBN governor did not indicate the magnitude of the proposed hike in the capital base, we have assumed what the proposed increment will be based on three different scenarios underpinned by current macroeconomic conditions. On the back of that, we were able to determine the number of banks (across the three licence types) that may fall below the new minimum capital thresholds.
“In a worst-case scenario, i.e., given a capital multiplier of 15, about 17 out of 24 banks would not meet the new minimum capital.”
The report noted that the plan to recapitalise banks was premised upon the recent devaluation of the naira in 2023. It explained that the exchange rate as of 2005 during the last exercise in 2005 stood at N132.9/$ but the naira currently exchange for over N1400/$. According to the firm, this implies that the recapitalisation may require a capital multiplier of 10 or more based on exchange rate differentials.
He stated further that given the current data, the N25 billion capital base of the Nigeria commercial bank is outdated when also situated within the recent development in Nigeria’s economy, and the proposed N1 trillion economy drive of the current administration.
In his words “We should not just pick an arbitrary figure and say it has to be, let’s say N300 billion or N500 billion. I think based on the respective licenses, there ought to be a stress test conducted. When you conduct stress you can find out how those categories of banks will perform in crises or how in terms of a stimulated economy, downturn, or how they can withstand market shocks. So I believe that there ought to be a stress test.
It is important to note that a Bank Stress Test is a stimulation or analysis conducted to analyze how a bank will be impacted under adverse conditions, stress tests help assess the resilience of the financial system in International Monetary Fund (IMF) member countries, it also underpin policy advice to preserve or restore financial stability. For example, a financial market crash or recession.
Also speaking, Muda Yusuf, the immediate past director general of the Lagos Chamber of Commerce and Industry (LCCI), said irrespective of the report, most of the Nigeria commercial banks are financially stable going by the available soundness indicators.
He said that while it is true “that the exchange rate depreciation has affected the value of the minimum capital base, that is it has been massively eroded, and there is a need to increase that capital base, which some of the banks on their own have been doing. He however charge the apex bank to give Nigeria commercial banks the required time.
Concerned about the dwindling professionalism and dampened ethical standards that have been the order of the day in the Nigeria banking sector, Wunmi charged the Central Bank of Nigeria (CBN), to raise the minimum ethical professional standards in the Nigeria Banking sector, where honest probity transparency would reign. He said it was high time the apex bank shifted emphasis on the enforcement regime, which is moving from self-regulation to a very strict penal regime.
Wunmi said that the focus over time has always been market recapitalization, however, there is a major aspect that has not attracted attention, there is the need for us to also raise minimum ethical professional standards. Banking today in Nigeria has gone to the dung, the standards are no longer there. The usual probity, honesty, and transparency that used to be associated with bankers in those days are no longer there.
“A lot of fraud has been committed today the Economic and Financial Crime Commission (EFCC) said 80 per cent of fraud perpetrated is done in collaboration with insiders within the bank.
He stressed that the apex bank, under the watch of Yemi Cardoso, should shift the emphasis on the enforcement regime from self-regulation to a very strict penal regime.
He noted that there should be criminalisation of fraudulent practices to curb insider trading, round-tripping, share price manipulation, forex speculation, and force trading by bankers.
Other malpractices such as market manipulation, granting of bad loans to directors, collusion with fraudsters and “Yahoo boys” should no longer be treated as infractions as the offenders ought to be prosecuted under a very strict penal regime.
“Those involved ought to be prosecuted and sent to jail as is done in other societies”, stating that if Nigeria envisioned a boisterous economy and thriving banking sectors, the apex bank must do more.
He noted that there should be criminalization of practices. The practice over time has been that most fraud committed share price manipulation, forex speculation, force trading,
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