The global financial crisis of 2008 highlighted multiple vulnerabilities within the banking sector in different countries, particularly in Nigeria. In order to mitigate these financial stability risks, regulators have since employed various micro and macro-prudential policy tools, one of which is bank capital requirements.
These requirements, typically set as a minimum ratio of total regulatory capital to risk-weighted assets, aim to ensure that banks can withstand unexpected losses and maintain solvency in a crisis.
Barring the collapse of Switzerland’s Credit Suisse bank in March 2023, it has been almost a decade of stability in the global banking space. It has also been the same story on the Nigerian landscape amid mergers and acquisitions of some banks by Tier-one lenders whilst others have remained strong on their own.
However, while there has been stability, and also a change of administrations (from Buhari to Tinubu), banks have found it difficult to meet the needs of driving and sustaining economic growth. For example, the Central Bank of Nigeria (CBN)’s helmsman, Olayemi Cardoso, last year, indicated that banks were not adequately capitalized to meet the needs of a $1 trillion economy which the present administration under President Bola Tinubu is trying to achieve.
According to him, there is an urgent need to increase the capital base of banks operating in the country. Hence, it was not a surprise that the apex bank rolled out a circular reviewing the minimum capital requirements for all commercial, merchant, and non-interest banks operating in the country. Under the current review, commercial banks with international banking licenses would have to raise their minimum capital to N500 billion, national banks to N200 billion, regional and merchant banks to N50 billion, non-interest national banks to N20 billion, while non-interest banks will have to meet a new minimum threshold of N10 billion.
To meet the new capital requirements in two years, the CBN directed banks to consider the injection of fresh equity capital through private placements, rights issues and/or offer for subscriptions. They could also consider mergers and acquisitions and/or upgrades or downgrades of their licenses.
The circular which was signed by Director, Financial Policy and Regulation Department at the CBN, Haruna Mustafa, also stated that for existing banks, the capital requirements specified above shall be paid-in capital (Paid-up plus Share Premium) only. Bonus issues, other reserves and Additional Tier 1 (AT1 Capital shall not be allowed or recognized for the purpose of meeting the new minimum capital requirements”. Although this particular statement has sparked apprehension and uncertainty within the investment community, particularly among shareholders who are closely monitoring developments, the apex bank is expected to roll out circular, explaining in further details.
Considering the fact that the N25 billion minimum capital base stipulated during the last bank recapitalization exercise which was equivalent to $187 million then is worth only $32.5 million today, this is to say that the industry as a whole has fallen short of the standards set for it in 2005.
According to analysts who spoke to Daily Sun, asking banks to recapitalize is quite desirable given the devaluation of the naira and high rate of inflation in recent years, but it is left to the CBN to take a different approach to the exercise this time considering the democratization of the industry and its current economic circumstances which may inhibit any capital raising exercise.
However, it is not enough to ask banks to recapitalize, the ultimate goal is for them to have increased capacity to positively impact the economy of the country for the benefit of the people. While the last bank capital raising exercise was deemed to be a success which attracted about $3 billion in additional equity into the Nigerian banking industry, the real benefit of a stronger financial services industry was not felt by majority of Nigerians because as of today only a small portion of Nigerians have access to bank loans which is roughly the same as what obtained before the bank consolidation exercise.
Economic analysts’ react
Economic analyst and management consultant, Kunle Oshobi said that whilst recapitalization is a step in the right direction, most entrepreneurs still find it difficult in accessing bank loans and this was one of the challenges the bank recapitalization exercise was meant to address.
“However, despite the success of the capital raising exercise, there was no increased flow of credit to Small and Medium Scale Enterprises (SMSEs). Rather the government’s appetite for bank credit through Treasury bills and government bonds escalated to take advantage of the increased capacity of our banks.
As a result of this, up to 70 per cent of the loans given out by the banking industry are to the government at various levels and this has led to the private sector being crowded out of the money market. For the proposed bank recapitalization exercise to have the desired effect of helping to grow the economy, there must be policies put in place to ensure that banks are incentivized to increase their lending to SMSEs (especially the productive sector) while government’s dependence on the money market should be reduced to ensure that more funds are available to the private sector to finance the growth of the economy”, Oshobi explained.
In a tweet seen on X by Daily Sun, Co-founder, BudgIT, Oluseun Onigbinde, stated that while inflation is a stubborn entity and the Cardoso-led administration applying pressure from all ends, bank recapitalization is another pathway to fighting the soaring inflation.
He however, raised concerns stating that he was worried that the banking industry will not be the same.
Onigbinde said, “Inflation is a basket of issues. A squeeze on monetary liquidity is the only element with the CBN’s control. The possible outcome from the CBN’s circular is that mergers will happen and I hope they are able to build a case for public offers. Acquisition is also in play with foreign banks. Job losses are coming and our fundamentals remain weak. The truth is our banking industry is too small for the size of our economy”.
Conclusion
With respect to an increase in requirements, banks can accumulate more capital, reduce total assets or shift their asset composition towards less risky assets. They could also simply maintain their capital ratios and dig into their pre-existing capital buffer provided this buffer is sufficiently large. If banks lower lending as part of their adjustment, this could adversely affect macroeconomic activity today. Instead, accumulation of more capital can improve bank resilience to future shocks, thus improving financial stability.