What Bank recapitalization could mean for Nigerian Economy

President Bola Tinubu and CBN Governor Yemi Cardoso recently announced that there will be an upward review of the bank capital requirements in line with the ambition to build a $1 trillion economy. This article provides an in-depth explanation and historical perspective of how previous capitalization exercises went, and what Nigerians can expect from another round of recapitalization of banks in the country.

Banking in Nigeria has come a long way since the pre-colonial times when the first two banks were set up in the 1890s. Only one of them – the Bank of British West Africa – remains to date, although with a different name (First Bank of Nigeria Plc, having morphed through several structures and crises.

Just a couple of weeks back, President Bola Tinubu and the Central Bank Governor Olayemi Cardoso announced the recapitalization of banks in line with the $1 trillion economy goal set for the country. Representing President Bola Tinubu at the 40th Anniversary Celebration of The Guardian Newspapers in Lagos,  According to the President, the President’s Special Adviser on Information and Strategy, Bayo Onanuga said;

“To arrive at the $1tn economy, we must address the capital adequacy of our banks that will prepare the fuel for this journey.”

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Explaining this decision further, CBN Governor Cardoso noted at the 58th annual Bankers’ Dinner that many of the banks can currently withstand mild to moderate stress, but would not be able to service a $1 trillion economy.

“It is crucial to evaluate the adequacy of our banking industry to serve the envisioned larger economy. It is not just about its current stability. We need to ask ourselves, can Nigerian banks have sufficient capital relative to the finance system needs in servicing a $1tn economy shortly, in my opinion, the answer is no, unless we take action.”

This is not much different from what former CBN Governor Emefiele already hinted at in 2019.

“In the next five years, we intend to pursue a programme of recapitalising the banking industry so as to position Nigerian banks among the top 500 in the world. Banks will therefore be required to maintain higher level of capital, as well as liquid assets in order to reduce the impact of an economic crisis on the financial system.”

Some of the big banks like Zenith Bank Plc, United Bank for Africa Plc, Access Holdings Plc and FBN Holdings Plc have since then made moves to increase their market capitalization.

Statista says that as of 2022, Nigeria’s GDP was worth 477 billion USD, so let’s put the projected $1 trillion into perspective. Based on Investopedia estimate as of June 2023, a $1 trillion economy would only place Nigeria side by side with the 6th largest company in the world – NVIDIA – which has a market capitalization of $1.06 trillion.

Market capitalization data show that the largest company Apple Inc. has a market capitalization of $2.95 trillion, with Microsoft following closely behind with $2.52 trillion, and Saudi Aramco with $2.09 trillion. Alphabet Inc. and Amazon are 4th and 5th with a market capitalization of $1.59 trillion and $1.33 trillion respectively.

By implication, the distance between where we are now and the proposed trillion-dollar economy is not a short one.

What Bank capitalisation did in the past

In 1990 the increase of capital requirement from 5 million to 25 million naira for commercial banks, and from N6 million to N12 million for merchant banks in 1990, had exposed as many as 28 banks as distressed and many of them turned insolvent due to several issues. In fact, by the end of 1995, more than half of the sixty banks were not just distressed, but actually insolvent, resulting in a loss of trust in the banking system.

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The 2005 c occurred during the consolidation exercise when the then CBN Governor Charles Soludo (now Anambra State Governor) increased the capital base from N2bn to N25bn for commercial banks, and N20 billion for merchant banks.

This move strategically trimmed out 64 banks, reducing the number of banks in Nigeria to 25. Most of the banks that fizzled out had issues ranging from weak capital base, persistent illiquidity, weak corporate governance, poor asset quality, insider abuses, unprofitable operations, and over-dependency on public sector funds. Many of them had not even rendered returns for years.

By shoring up their capital base, the banks increased shareholder funds, and reduced their risk exposure. The increased capital base allowed banks to increase lending activities, thus triggering economic activities and job creation in the years that followed. However, one of the immediate consequences of the 2005 recapitalisation exercise was merger-induced layoffs in the banking industry and distressed businesses owing to disrupted credit flow from weaker entities in some of the merged banks.

Does this give you an idea of what to expect after another recapitalisation exercise? Yes, it should. This exercise could see big banks swallowing up some small banks, and some small banks coming together to form new big banks.

Is bank recapitalisation required for Nigeria to build a $1-trillion economy?

Regarding the proposed capitalization, Research Analyst Samuel Oyekanmi agrees that the move is necessary as banks need to inject more funds into the private sector through loans, and they need capital to do that. It is only when the private sector has access to funds that they can drive productivity and economic expansion.

“The banking sector is like the lifeblood of the economy, seeing that one of their core functions is to distribute credit from surplus areas to deficit sectors or the economy. In giving loans to the public you are as good as your capitalization and cash flow, hence the need for banks to be highly capitalized to have the funds necessary to drive the level of growth that government intends to drive.”

The extra capital to be injected into the banks will either be sourced from foreign investors (meaning more FDI) or locally, thus channeling more idle funds into use in ‘one of the fastest growing sectors’.

While the recapitalization exercise alone is not expected to catapult Nigeria to a trillion-dollar economy, it will set the tone so that when the other issues are addressed, the banks will be capable of handling the projected economic growth. Oyekanmi lists the other issues that need to be addressed including; “infrastructure, FX issues, ease of doing business, insecurity, and others”.

The bigger question now is “From 25 billion naira to what?”

Even though the requirement is 25 billion in capital base, more than 10 of the existing banks are already capitalised to the tune of over 100 billion naira, and Zenith Bank leads the pack with a capitalisation of over N1 trillion.

However, today’s banks are battling stiff competition from fintechs, microfinance institutions, and mobile money operators who offer low or zero charges, and for the banks to come out on top, they may truly require more financial muscle to withstand ongoing disruptions. This is one rationale for the proposed recapitalisation exercise.

When Godwin Emefiele first hinted at this exercise at the start of his second term as CBN Governor in 2019, here was what he had to say. “If you relate it, N25 billion in 2004 exchange rate, which was about N100/$, N25 billion, is almost about $200 million today, if you relate N25 billion at 360, you can see that it is substantially lower than $75 million. So, what we are trying to say is that the capitalisation has weakened quite substantially, and there is a need for us to say that it is time to recapitalise Nigerian banks again.

As you can see, he made this statement at the time the official exchange rate was N360/$. The recent floating of the FX has resulted in a further devaluation of the naira, and eroded banks’ capital base even further. The official rate of the naira to dollar as at the start of December 2023 was already over N800/$ and the numbers are worse off in the black market.

If the CBN decides to achieve a dollar equivalent of $200 million in bank capitalisation, we might be seeing a new capital requirement in the range of N200 billion for Nigerian banks. Given that the target is a $1 trillion economy, the capital requirement could even be northwards of this sum.

Muda Yusuf, chief executive officer, the Centre for the Promotion of Private Enterprise, agreed that the proposed capitalization is necessary to “ensure that the capital base of banks can support their current exposures in the interest of the financial system’s stability”

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Economic Analyst Kalu Aja tweeted that recapitalizing banks is a good move as it means that the era of printing and distributing naira is over, and the banks can now market public offers. He also noted in another tweet that the government has to initiate many other policy reforms to achieve its ambition of becoming a $1 trillion economy, as bank recapitalisation alone cannot take Nigeria there.

“Stop unnecessary imports; Boost exports; Stop printing Naira; Grow consumption via private; and Issue revenue bonds for infrastructure” as these things lessen the GDP value in dollar terms.

The banking system takes up a distinctive place in every economy, and this necessitates rigid supervision and control to create an industry that is reliable, and trustworthy.

However, the government might want to consider the suggestion of the CEO of SD & D Capital Management, Mr Idakolo Gbolade, that the banks be given an “adequate time frame of between 2 to 3 years” to achieve the new capital requirement, whatever the sum may be.

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