CPPE backs CBN’s recapitalisation move

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The Centre for the Promotion of Private Enterprise has backed the recent move by the Central Bank of Nigeria to recapitalise banks.

The centre’s Chief Executive Officer, Dr Muda Yusuf, disclosed this in a statement on Monday.

The CPPE CEO noted that the purpose of adequate capitalisation is to ensure the efficiency and stability of the financial system.

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“The essence of recapitalisation is to ensure the safety of depositors’ funds, strengthen the stability of the financial system, deepen resilience of the banking system and reposition the bank to support growth,” he said.

The CBN, on Thursday, unveiled new minimum capital requirements for banks, pegging the minimum capital base for commercial banks with international authorisation at N500bn.

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It disclosed this in a circular signed by its acting Director of Corporate Communications, Sidi Ali.

Ali noted that the new minimum capital base for commercial banks with national authorisation is now N200bn, while the new requirement for those with regional authorisation is N50bn.”

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She also disclosed that the new minimum capital for merchant banks would be N50bn, while the new requirements for non-interest banks with national and regional authorisations are N20bn and N10bn, respectively.

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.

Yusuf stated that the last major review of minimum capital requirements was done in 2005.

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 the N25bn for a national bank, for instance, was equivalent to $192m. The naira equivalent today is about N250bn.

For the international banking licence, it would be about $384m, an equivalent of about N500bn.

He said, “The reality is that the capitalisation requirement has not increased materially in real terms, that is when adjusted for inflation.

“The real issue is that inflation had weakened the value of money over time, which makes recapitalisation imperative and inevitable.”

Reports from the CBN 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 per cent.

The Non-Performing Loans as a ratio of total loan assets was 4.81 per cent as against the prudential threshold of 5 per cent, which is also positive. Liquidity ratio of 40.14 as against the prudential minimum of 30 per cent, which also reflects a healthy position.

Yusuf said, “Based on the financial soundness metrics, Nigeria banks are adjudged to be generally healthy. However, this does not diminish the need for regulatory authority 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.”

Commending the CBN, Yusuf said the proposed recapitalisation of banks should be done in a manner that would minimise 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 minimise 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 banks 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,” he said.

He, however, stated that it is important for the CBN to assure depositors of the safety of their funds in the banking system, irrespective of the current level of capitalisations 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.

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“We implore the CBN to ensure minimum risk to shareholders and employees in the banking system, across board. It is also imperative to guide against elevated concentration risks and the deepening of oligopolistic structure in the banking system,” he added.

The CPPE executive said, “There are concerns around the large interest rate spreads in the Nigeria banking system.

“Spread between deposits and lending rates are sometimes as high as 20 per cent, which is one of the highest globally.

“The tenure of funds in the banking system is extremely short. Over 80 per cent of funds are of one year tenure or less, which explains the high level of assets and liability tenure mismatch in the banking system.”

 

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