Capital offence
No fewer than 17 out of the existing 24 Deposit Money Banks (DMBs) may be unable to meet the Central Bank of Nigeria’s (CBN) capital…
No fewer than 17 out of the existing 24 Deposit Money Banks (DMBs) may be unable to meet the Central Bank of Nigeria’s (CBN) capital requirement if it is increased from its current ₦25 billion, according to a report by Ernst and Young. The report stated that the plan to recapitalise banks was premised upon the naira devaluation. CBN Governor Olayemi Cardoso mentioned that the CBN may raise banks’ minimum capital to enhance their ability to support Nigeria’s goal of becoming a $1 trillion economy by 2026. Last year, Punch reported that DMBs were exploring mergers and acquisitions to raise additional capital.
Banking regulators routinely conduct stress tests on banks operating within their jurisdictions, often revealing areas of concern. Perhaps the most important in Nigeria’s banking industry was the 2009 stress test jointly conducted by the Central Bank of Nigeria (CBN) and the Nigerian Deposit Insurance Corporation (NDIC). The test revealed that banks had sizable off-balance sheet instruments that concealed significant nonperforming loans, including those that had been rolled over or otherwise classified as performing, in addition to serious liquidity issues and governance problems. In that case, 10 banks, accounting for about a third of the banking system assets, were classified as either insolvent or undercapitalised, and the CBN was forced to take over several banks and move bad assets to the newly created Asset Management Company of Nigeria (AMCON). The CBN also injected ₦620 billion (about US$4.1 billion) of liquidity into the banking sector through unsecured and subordinated debt and guaranteed all interbank lending transactions (expired end-December 2011), foreign credit lines and pension deposits. The goal of the CBN with this recapitalisation exercise is to improve the resilience of Nigerian banks by increasing the minimum capital requirement. The plan to recapitalise banks is linked to the naira devaluation. Banks must adjust their capital base to remain resilient as the naira’s value fluctuates. The capital multiplier of 15 means banks must maintain capital equal to 15 times their risk-weighted assets. The last significant recapitalisation of Nigerian banks occurred in 2004 when the CBN raised the minimum capital requirement for banks from ₦2 billion to ₦25 billion. As a result, the number of banks reduced significantly from 89 to 24. Similar to the banking industry’s recapitalisation in the early 2000s, the current exercise may result in some banks being left behind. While there have been some natural acquisitions, we anticipate that the central bank’s push for recapitalisation will result in a more robust, resilient, and well-governed financial sector in Nigeria. Banks with stronger capital bases are better equipped to withstand economic shocks and provide reliable services to customers. Consequently, the perception of banks’ ability to safeguard deposits and manage risks improved. They also can extend more credit to various sectors and participate more actively in financing businesses, infrastructure projects, and individual needs. However, striking a balance between regulatory requirements and banks’ operational capacity remains essential since the outcome will significantly impact the financial landscape.