The Centre for the Promotion of Private Enterprise has expressed support for the decision of the Central Bank of Nigeria to increase the capital base of banks, even as it calls for the right management of the process to avoid economic disruptions.
This was revealed in a statement signed by the Chief Executive Officer of CPPE, Dr Muda Yusuf, on Monday.
The CBN in a circular to commercial, merchant, and non-interest banks and promoters of proposed banks announced the review of the capital requirements for the operations of the affected categories of banks in the country. Citing domestic and global shocks, the apex bank, in a statement signed by its Acting Director of Corporate Communications, Sidi Ali, said it had become necessary to raise the capital base of the banks. Thus, the CBN directed commercial banks with international authorization to increase their capital base to N500bn and national banks to N200bn while those with regional authorization were expected to achieve an N50bn capital floor.
Similarly, non-interest banks with national and regional authorizations will need to increase their capital to N20bn and N10bn, respectively.
Reacting to the development, Yusuf said that inflation in the country had eroded the capital base of banks over the years, hence the need to recapitalize.
He said, “The last major review of the minimum capital requirement was done in 2005, some 18 years ago. That was under President Olusegun Obasanjo, with Prof. Charles Soludo as CBN governor. But since then, the value of the minimum capital has been significantly eroded by inflation.
“For instance, the official exchange rate in 2005 was about N130 to the dollar. This meant that the N25bn for a national bank, for instance, was equivalent to $192m. The naira equivalent today is about N250bn. For the international banking license, it would be about $384m, an equivalent of about N500bn. The reality is that the capitalization requirement has not increased materially in real terms, that is when adjusted for inflation.”
“The real issue is that inflation had weakened the value of money over time which makes recapitalisation imperative and inevitable. The essence is to ensure the safety of depositors’ funds, strengthen the stability of the financial system, deepen resilience of the banking system, and reposition the bank to support growth.”
Yusuf called for orderliness in the recapitalization process to ensure minimal shocks and disruptions to the banking system and the economy at large.
“We commend the CBN for giving a timeline of 24 months for banks to comply. This would minimize disruptions and dislocations in the financial system. It would also ensure a smooth transition to the new capitalization regime for banks.
“With the current approach and timeline given by the CBN, the risk of bank collapse or hasty mergers and acquisitions should be minimized. It is also laudable that the current categorization of banks with differential capital requirements has been maintained – international, national, and regional. This is necessary to allow for inclusion and reduce the risk of dominance of the banking space by a few big banks,” he asserted.
The CPPE boss added that the apex bank must assure depositors of the safety of their funds in the banking system, irrespective of the current level of capitalization of banks. “It is important to sustain the confidence of the banking public about the soundness and stability of the Nigerian banking system, especially because of the perception and vulnerable risks of smaller banks.
“We implore the CBN to ensure minimum risk to shareholders and employees in the banking system, across the board. It is also imperative to guide against elevated concentration risks and the deepening of oligopolistic structures in the banking system,” Yusuf cautioned.
Meanwhile, Professor of Capital Markets at the University of Nasarawa, Uche Uwaleke, in his comments made available to The PUNCH, called for special consideration for non-interest banks in the country.
“Given the young age of non-interest banks in Nigeria, they should be allowed a longer period, say, three years, to meet the minimum capital requirements,” he suggested.
(Source – The Punch)
