The recent announcement by Olayemi Cardoso, the governor of the Central Bank of Nigeria (CBN), regarding the proposed bank recapitalization has generated both applause and skepticism within the financial industry.
Speaking at the Chartered Institute of Bankers of Nigeria’s annual bankers’ dinner, Cardoso emphasized the need for Nigerian banks to increase their capital to effectively serve a $1 trillion economy. While the move has been welcomed as a step towards financial robustness, some industry insiders express concerns and pose critical questions.
The capital adequacy ratio of Nigerian banks, a measure of their financial strength, dropped to 11.2 percent in June 2023 from 13.0 percent in May, though still within the prudential requirement of 10 percent to 15 percent. Some industry observers argue that recent devaluation and historically high unremunerated reserves have contributed to the decline in capital ratios.
An anonymous banking executive acknowledged the lower capital ratios but suggested that attracting capital into banks requires addressing exorbitant taxes and regulations. The executive highlighted the need for the CBN to ease some of its controls to enable potential investors to forecast the future of banks accurately.
The executive emphasized the importance of rebuilding investor confidence, stating, “We need to spice up banking stocks to raise the capital to achieve our $1 trillion economy.”
A former commissioner of finance added to the conversation, calling for more empirical and transparent determination of the Cash Reserve Ratio (CRR) debits by the CBN. The former commissioner questioned the cumulative sterilization of 62.5 percent of loanable deposits and urged clarity on how banks fund their loan books despite regulatory constraints.
Some critics, familiar with the inner workings of the CBN, drew parallels with the previous consolidation exercise, cautioning against rushing into policies that may create artificial capital and result in unforeseen consequences.
In response to the proposed recapitalization, Ayodele Akinwunmi, a relationship manager at FSDH Merchant Bank Limited, expressed optimism, stating that it would position banks to support the economy and attract foreign investors. Akinwunmi suggested that the process could drive foreign direct investments into the banking sector, contributing to long-term foreign currency stability.
Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, welcomed the recapitalization plan, citing the erosion of banks’ capital due to the depreciating domestic currency. Yusuf emphasized the importance of ensuring that the capital base of banks remains supportive of their current exposures for financial system stability.
As debates continue on the potential impacts of the recapitalization plan, industry stakeholders stress the need for clear strategies and transparency to navigate the path toward a $1 trillion economy. The challenges posed by energy and transportation infrastructure are also highlighted as crucial factors influencing the nation’s economic growth.
While the CBN’s move is seen as a positive step, the road ahead demands careful consideration and collaboration between regulatory bodies and industry players to achieve a balanced and sustainable financial system.