The purpose of adequate capitalization is to ensure the efficiency and stability of the financial system. Capital adequacy measures the capacity of a bank to meet its financial obligations and absorb any shocks related to losses. It measures the financial soundness of a bank, ensures the safety of depositors’ funds, deepens financial intermediation, and enhances the capacity to support economic growth through the funding of investments.
Current Status of Bank Capitalization
The current minimum statutory capital requirements for banks are as follows:
International Banks N50 billion
National Banks N25 Billion
Regional Banks N10 billion
The last major review of minimum capital requirements was done in 2005, some 18 years ago. That was under President Olusegun Obasanjo, with Prof Charles Soludo as CBN governor. But since then, the value of the minimum capital has been significantly eroded by inflation. For instance, the official exchange rate in 2005 was about N130 to the dollar. This meant that N25 billion for a national bank, for instance, was equivalent to $192 million. The naira equivalent today is about N250 billion. For the International Banking license, it would be about $384 million, an equivalent of about N500 billion. The reality is that the capitalization requirement has not increased materially in real terms, that is when adjusted for inflation.
The real issue is that inflation has weakened the value of money over time which makes recapitalization imperative and inevitable. The essence is to ensure the safety of depositors’ funds, strengthen the stability of the financial system, deepen the resilience of the banking system, and reposition the bank to support growth.
Financial Soundness of the Nigerian Banking Sector
Reports from the Central Bank of Nigeria attest to the fact that Nigerian banks have good soundness indicators. The industry Capital Adequacy Ratio as of January was 13.7 per cent, which was above the prudential threshold of 10 percent. The Non-Performing Loans as a ratio of total loan assets was 4.81 percent as against the prudential threshold of 5 percent, which is also positive. A liquidity ratio of 40.14 as against the prudential minimum of 30 percent, which also reflects a healthy position.
The summary is that based on financial soundness metrics, Nigerian banks are judged to be generally healthy. But this does not diminish the need for regulatory authorities to ensure that this soundness and stability is preserved and improved upon, especially because of the recent macroeconomic headwinds. This, perhaps, is what informed the current policy of the CBN to review the capital base.
Need to Ensure Minimum Disruption of the Banking System in the Proposed Review of Minimum Capital Requirements for Banks.
The proposed recapitalization of banks should be done in a manner that would minimize shocks and disruptions to the banking system and the economy at large. We commend the CBN for giving a timeline of 24 months for banks to comply. This would minimize disruptions and dislocations in the financial system. It would also ensure a smooth transition to the new capitalisation regime for banks.
With the current approach and timeline given by the CBN, the risk of bank collapse or hasty mergers and acquisitions should be minimized. It is also laudable that the current categorization of banks with differential capital requirements has been maintained – international, national, and regional. This is necessary to allow for inclusion and reduce the risk of dominance of the banking space by a few big banks.
Meanwhile, the CBN must assure depositors of the safety of their funds in the banking system, irrespective of the current level of capitalisation of banks. It is important to sustain the confidence of the banking public about the soundness and stability of the Nigerian banking system, especially because of the perception and vulnerable risks of smaller banks.
We implore the CBN to ensure minimum risk to shareholders and employees in the banking system, across the board. It is also imperative to guide against elevated concentration risks and the deepening of oligopolistic structure in the banking system. There are also concerns about the large interest rate spreads in the Nigerian banking system. The spread between deposits and lending rates is sometimes as high as 20 percent, which is one of the highest globally. The tenure of funds in the banking system is extremely short. Over 80 percent of funds are of one year tenure or less, which explains the high level of assets and liability tenure mismatch in the banking system.
Access to credit by small businesses remains a major inhibition of economic growth and economic inclusion. Small businesses account for over 50 percent of GDP but get less than 5 percent of credit in the banking system. The financing gap in the Nigeria SME space is about $32.2 billion [over N40 trillion], according to IFC estimates. De-risking the credit space for small businesses should be accorded high priority in the new dispensation. This is essential to boost growth, create jobs and deepen economic inclusion.
The apex bank should caution all players in the banking sector against predatory and other anti-competitive practices in the industry on account of the recapitalization policy.
Muda Yusuf is the Chief Executive Officer, Centre For The Promotion of Private Enterprise [CPPE]
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