• Broad welcome to bank recapitalisation

• Questions over $1trn economy target

Reactions were quick and immediate but they were mixed from a raft of local and international analysts contacted by Business a.m. following the strongest hint yet from 74-day-in-the-saddle Central Bank of Nigeria (CBN) governor, Olayemi Cardoso, that the apex bank is planning another round of higher capital limit for banks operating in country.

Governor Cardoso, in what is his most elaborate hints of the broad direction he would be taking the central bank as Nigeria’s monetary policy czar, linked a potential higher capital requirement for banks to the government’s dream of achieving a $1 trillion economy by 2035, while speaking to a gathering of senior, middle and executive level bankers in a keynote address at the 58th annual dinner and 60th anniversary of the Chartered Institute of Bankers of Nigeria (CIBN) in Lagos.

Cardoso presented the capital raising plan as part of reforms aimed at improving Nigeria’s financial capacity, and said that banks would be required to increase their capital base, describing it as being in the apex bank’s plans to direct commercial banks in Nigeria to align their capital levels with the financing needs of a $1 trillion economy. 

He explained that President Bola Tinubu’s administration has set a target of transforming Nigeria into a $1 trillion economy by 2035 and that the banking sector will need to significantly increase its capital base to achieve this goal. 

He stated: “Esteemed guests, considering the policy imperatives and the projected economic growth, it is crucial for us to evaluate the adequacy of our banking industry to serve the envisioned larger economy. It is not just about the stability of the financial system in the present moment, as we have already established that the current assessment shows stability.

“However, we need to ask ourselves: Will Nigerian banks have sufficient capital relative to the financial system’s needs in servicing a $1.0 trillion economy in the near future? In my opinion, the answer is “No!” unless we take action. Therefore, we must make difficult decisions regarding capital adequacy. As a first step, we will be directing banks to increase their capital.” 

Analysts from local and international markets in response to questions by Business a.m. expressed mixed reactions at the weekend with a broad and cautious welcome for the plan to raise capital, but some raised serious questions over Governor Cardoso’s statement that the plan to raise capital is linked to government’s $1 trillion economy growth desire.

Anthony Goldman, London-based independent political and economic risk analyst, told Business a.m. that, on its own merit, any plan to raise bank capital is probably an overdue correction considering inflation and devaluation of the country’s currency, especially in terms of international competitiveness.

Goldman, however, faulted Cardoso’s attempt to link the recapitalisation to preparation for a $1 trillion economy. “I guess there is an irony between recap to prepare for a trillion dollar economy and a recap to acknowledge the economic erosion since 2004 – and still with details from where this growth will come so unclear,” he explained.

He sees the attempt to link a recapitalisation plan to an economy with a $1 trillion size to “trying to put a positive spin on an overdue correction. Which is not a bad thing for market sentiment.” 

According to him, markets in Europe and the United States will welcome any attempt made to correct the erosion brought about by currency devaluation and inflation, but he notes that “They [markets] will look for further signs of process and institutional stability at the CBN – and much more in the way of policy detail from the administration as to the pathways to achieve the kind of growth the governor [Cardoso] has targeted.”

Goldman’s sentiment around a $1 trillion economy is shared by a very senior international debt market analyst based in Lagos but who does not want his name in print. According to him, Cardoso admits that “bank capital is fine today as he says. Basis for an increase in capital is some fictional $1 trillion economy in 7 years?” He queried, suggesting lack of confidence in the GDP growth ambition.

He is in complete disagreement with the talk about capital and quipped, “What is capital? What do you need it for? What is the capital adequacy ratio of banks? Those with low CAR are raising, like FBN. Not all banks want to be big. Does Citi Nigeria need the same capital as Zenith? No!” He asked rhetorically.

Drawing on the structure in the United States, he said there are 2500 banks there and that they are not all the size of JP Morgan, maintaining that there are too few banks in Nigeria. 

“If the capital requirement in 1989/90 was what it is today, GTBank and Zenith wouldn’t exist. Focus on CAR. Forget the exchange rate. We don’t earn dollars in Nigeria,” he advised.

The debt market specialist said having bigger banks has not solved power industry issues, stressing that banks don’t make economic policies and they don’t run the country. He said the problem lies in governance.

Cardoso’s broad policy pronouncements at the CIBN dinner raised debates in many circles throughout the weekend ahead of the local markets opening Monday, especially with other analysts looking at the potential impact of the proposed recapitalisation on the economy. 

Uche Uwaleke, a professor of finance and capital markets and president of the Association of Capital Market Academics of Nigeria, said the idea of recapitalising banks is a positive development that could benefit the economy. 

Uwaleke believes that recapitalisation could lead to stronger and more resilient banks, which could in turn help to boost investor confidence and improve access to credit. 

“It goes without saying that capital is needed to finance big-ticket projects especially when the government is targeting a 1 trillion dollar economy in a few years’ time.

“But I think the strategy should be somewhat different from the approach adopted in 2005. It should be more about incentives than coercion,” he suggested.

Uwaleke observed that some deposit money banks (DMBs) in Nigeria, particularly those in the FUGAZ category (First Bank, UBA, Guaranty Trust Bank, Access Bank, and Zenith Bank), are already taking steps to increase their capital base. These efforts are being driven by the banks’ desire to remain competitive and meet the increasing demands of customers, as well as the need to comply with regulatory requirements. 

Uwaleke, a professor at Nasarawa State University, who also advises the Nigerian Senate capital market committee leadership, said the CBN can use prudential guidelines to strengthen the tiered capital requirements for banks, with the capital adequacy ratio (CAR) being a good example. The CAR is a measure of a bank’s capital in relation to its risk-weighted assets, and it is used to ensure that banks have enough capital to cover their risks. Uwaleke believes that the CBN can make adjustments to the CAR to ensure that banks are well capitalised.

In addition to the CAR, Uwaleke suggested that the CBN could also use differential cash reserve requirements and preferential participation in the foreign exchange market to incentivize banks to maintain adequate levels of capital. 

Uwaleke added that it is important to consider the impact of regulatory changes on smaller banks that operate at a regional level. He argued that these banks should not be regulated out of existence, as they play an important role in providing access to financial services in underserved regions.

But in a counter to Uwaleke’s position on the prudential guidelines, Abiodun Ihebuzo, an institutional reforms facilitator and farmer, argued that the guideline “as the holy grail of banking is due for a review,”  and questioned if it [prudential guideline] was an eternal scroll. 

“How much of the content reflects current day’s reality, especially the doctrine of loan collateral and the single obligor limits?” She asked.

According to her, there are contents of the prudential guidelines that should be subjected to public engagements in order to harvest new ideas and ideals that are more realistics in the years ahead.

“The prudential guideline is one big bundle and a fair hiding place for financial  institutions to avoid creating avenues to implement the 2017 Secured Transaction in Moveable Assets Act. The CBN through the NCR is the custodian of the Act. Do we want to start something new or do we want to “grab it, snatch it and run away with” and then, “go to court”? The analyst asked in parody.

Sharing a similar sentiment as Uwaleke and Goldman, however, Muda Yusuf, chief executive officer, Centre for the Promotion of Private Enterprise (CPPE), expressed support for the CBN’s plan to recapitalise banks, noting that banks’ capital has been eroded over time. 

Yusuf highlighted the need to review the minimum capital requirements for banks in light of the recent depreciation of the Nigerian naira. He noted that the current minimum capital requirements were established when the naira was stronger, and that the decline in the currency’s value has resulted in a significant loss of value for banks.

Yusuf pointed out that during the banking consolidation exercise of 2004, the minimum capital requirement for banks was raised from N2 billion to N25 billion. This change meant that banks were required to have a minimum of $187 million in capital, based on the exchange rate at the time.

“Today the same N25 billion is an equivalent of just $32.5 million. This is a clear indication of the phenomenal erosion of the capital base of the banks. Recapitalisation of the banks has therefore become imperative. It is important to ensure that the capital base of banks can support their current exposures in the interest of the stability of the financial system,” he said.

But it was not just the recapitalisation matter Cardoso dwelt on in his CIBN presentation. He took a swipe at the past administration of the CBN for straying deeply into fiscal policy territory, especially for straying from the bank’s core mandates and engaging in fiscal policy making under the guise of developing financial activities.

Cardoso cited a lack of clarity in the relationship between fiscal and monetary policies, and pointed to the implementation of quasi-fiscal policies that injected N10 trillion into the economy through various intervention programmes. He argued that these policies were not effective in achieving their stated goals, and instead led to inflationary pressures and financial instability.

He vowed to discontinue the bank’s direct interventionist activities and instead rely on orthodox monetary policy tools to implement monetary policy. This is a marked departure from the CBN’s previous approach, which had been criticised by many economists and financial experts.

Cardoso acknowledged that the bank has been embroiled in controversy over the past few years, and he attributed this to a variety of factors. These included corporate governance failures within the bank, a loss of autonomy and a deviation from its core mandate. The CBN also faced criticism for its unorthodox use of monetary policy tools, a lack of transparency in the foreign exchange market, and a blurred line between fiscal and monetary policy. He acknowledged that these issues had caused public confidence in the bank to suffer.

In his words: “Hitherto, the CBN has strayed from its core mandate and engaged in quasi-fiscal activities that pumped over N10 trillion in the economy through different initiatives in sectors ranging from agriculture, power, and many others.

“These clearly distracted the bank from achieving its own objectives and took it to areas where it had limited expertise. Under my leadership, the Central Bank of Nigeria will vigorously address these issues.”

In order to address the ongoing challenge of rising inflation, Cardoso disclosed that the CBN will tighten the money supply for the next two quarters. He explained that this will be done by reducing the amount of cash in circulation through the issuance of open market operations (OMO) treasury bills. He noted that this is necessary to control inflation and maintain price stability.

Cardoso disclosed that the CBN will introduce a new licensing framework for fintechs and payment banks. He warned that operators who engage in activities outside of their licence will face sanctions.

As part of its efforts to create a regulatory environment that is suitable for the payment services sector, the former commissioner for economic planning and budget in Lagos State when President Tinubu was governor of the state between 1999 and 2007, announced that the CBN will conduct extensive consultations with stakeholders. He said the goal of these consultations is to develop a framework that is responsive to the rapid changes in technology and the changing needs of consumers. He stressed that this framework will be designed to promote innovation and competition in the sector while protecting consumers.

Cardoso advised banks to reassess the responsible banking framework and ensure that its requirements are effectively integrated into their business strategies. He noted that the CBN is committed to enhancing its own capacity in this area, so that it can provide assistance to other banks that still have work to do in terms of implementing their sustainability principles. He noted that this will be a long-term process that will require close collaboration between the CBN and the banking sector.

He stated that the Nigerian financial sector has been resilient in 2023, with key indicators of financial soundness largely meeting regulatory benchmarks. He noted that stress tests conducted on the banking industry have shown that the sector is resilient under mild-to-moderate scenarios of economic and financial stress. However, he acknowledged that there is still room for improvement and that the sector should continue to strengthen its resilience to potential shocks, noting that the banking sector is well-positioned to support the economy and contribute to economic growth.