PHILLIP ISAKPA IN LONDON, UK
A UK-based investment banker and chief executive officer of London Stock Exchange listed firm, Orchard Funding Group PLC, has told Business a.m. that some of the conditions outlined in Nigeria’s on-going banking sector recapitalisation appear to be at odds with what obtains in Europe and the United States.
Ravi Takhar, who has over 35 years experience in the creation, acquisition, financing, disposal and growth of financial services, in an exclusive interview in London published in this edition, said high minimum capital like the N500 billion (or $359 million) stipulated for international banking licence in Nigeria is good only for incumbent banks, but that it creates oligopoly and stifles competition.
“I think having a very high minimum capital requirement for banks as I understand is the case in Nigeria, is only good for incumbent banks, creates oligopoly, stifles any competition and ultimately creates banks that are ‘too big to fail’,” Takhar said.
Takhar, who last year published a book, “How to Build a Bank, a Guide to Key Bank Regulations, the Licence Application Process and Bank Risk Management”, sees the requirement of $359 million for setting up an international bank as a roadblock to the emergence of new banks in that segment.
“The minimum capital requirement of $359 million in Nigeria appears to be a complete roadblock to new banks being set up in the country and will effectively only enable banks who are “too big to fail” to exist,” said Takhar.
According to him, when compared with Europe and the United States where the minimum capital requirement can be as low as $5 million, the $359 million appears to be completely uncompetitive and restrictive.
On the directive not to calculate retained earnings as part of banks capital in this on-going recapitalisation programme, the investment banker who qualified as an investment banking solicitor with Clifford Chance, the global law practice, said while he is just a simple lawyer, not an accountant, “I know that retained earnings interact with a balance sheet by increasing reserves and therefore equity.”
Takhar said that on the directive regarding retained earnings, the Nigerian stance appears to be completely at odds with Europe and the US and also completely against international accounting standards.
He agrees with the principle of minimum capital requirements, and that it actually protects investors from a bank failure. But he noted that the problem is that an increase in capital leads to a corresponding reduction in return on capital.
He said capital and liquidity are important, but that they must be in the context of banks’ business plans.
“A thorough understanding of capital and liquidity requirements is fundamental to the understanding of how a bank works. A bank’s whole business, the amount and type of lending it can do is all determined by its capital. Liquidity is fundamental to any business, especially a bank whose business is money,” he explained.
Globally, Takhar said banking sector regulation has become over complex and disproportionate, noting that large banks and small banks must follow the same capital and liquidity rules, same governance requirements and same oversight.
“This is the way of the world after the global financial crisis of 2008. It has dramatically impacted bank returns and the provision of liquidity in the market. For example, there are less home mortgage loans in the UK today than there was in 2007,” Takhar said.
According to him, there has been no real test of all the new rules and regulations as the world has, thankfully, not yet suffered another financial crisis.
“If history is an indicator, this is just a matter of time. This will be the acid test for the current regulatory regime. No doubt it will be found wanting in some respect that no one expected. That is the nature of financial crises. I have lived through two, 1990 and 2008 and both were not expected, all thought that all banks were regulated and properly supervised before both those crises. Yet we still suffered a financial crisis,” he said.
He pointed out that it was not the small banks that caused the global financial crisis, just some of the very big ones.
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