Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, on Monday signalled plans to get the banks to recapitalise to a new level that makes them more resilient and rank among top 500 globally.
At a world press conference in Abuja where he outlined his agenda for the next five years as the head of the CBN, Emefiele said the present N25 billion capital base of banks was no longer sufficient, having been eroded substantially by the weakened naira.
He said at about N100 exchange rate in 2004, the N25 billion was about $200 million, but today, at N360 exchange rate, the amount is substantially lower than $75 million.
He said, however, that the proposed policy was subject to the final decision of the committee of governors who would then agree on the framework.
“The capitalisation has weakened quite substantially and it is time to recapitalise the banks once again,” Emefiele said.
Analysts believe that the recapitalisation of the Nigerian banking sector would help banks resilient to risks inherent in the macroeconomic space. This may, however, pose more challenge to mid-tier banks within the industry.
“It is our expectation that as more banks move to the adoption of the I&E FX rate for reporting purposes, there will be a need to shore up capital levels at some institutions. This is especially so, where foreign currency lending has been especially prevalent,” said Razia Khan, managing director/chief economist, Africa and Middle East Global Research, Standard Chartered Bank, London.
“We expect the process of capital-raising to be gradual, and to support the eventual recovery in lending growth from the Nigerian banking sector,” Khan said in an emailed response to BusinessDay.
The extent to which policy can play a more supportive role in helping bank loan growth has yet to be demonstrated, she said, adding that the need to balance domestic growth considerations with relative FX stability means that the pace of easing will need to be measured.
“The Nigerian economy is still vulnerable to shocks in the global market from trade tensions, volatility in crude oil prices, etc., which upon crystalising will have an effect on the banking sector, hence justifying the policy plan of the CBN,” Gbolahan Ologunro, research analyst at CSL Stockbrokers, said.
While increasing regulatory capital requirement should conveniently see the big lenders meet the new requirement (not disclosed yet), the struggle may be inherently more within the mid lenders.
While tier-one banks have recorded average capital adequacy ratio of about 20 percent above regulatory ratio of 15 percent, giving them more buffer ability to absorb shocks, mid-tier banks still lag behind with CARs below 20 percent.
However, CBN’s early announcement of its plans to recapitalise the banks should see management of these banks “be proactive to preserve their earnings to shore up their capital base”, Gbolahan said.
On the timing of the recapitalisation move by the CBN, Gbolahan said, “Although banks are still recovering from the 2015 economic crises, I don’t think the timing is inappropriate. We should expect the recapitalisation move the CBN by 2023.”
At the world press conference on Monday, Emefiele also committed that the CBN in the next five years would strive towards a single-digit inflation rate as well as help government attain the 5 percent growth target.
He said monetary policy measures embarked upon by the CBN would be geared towards containing inflationary pressures and supporting improved productivity in the agricultural and manufacturing sectors.
“Working with other stakeholders, we intend to bring down the cost of food items, which have considerable weight in the Consumer Price Index basket. Our ultimate objective is to anchor the public’s inflation expectation at single digits in the medium to long run,” he said.
Also in the next five years, he said, the CBN would work in developing a framework that would enable banks to securitise mortgage loans, which can then be sold in the capital markets.
The move to boost lending to the real estate sector of the economy through the securitisation of mortgage loans which will then be sold at the capital market is said to have the capacity to open up the economy for growth in areas of employment, investment and market deepening.
Securitisation is the conversion of an asset, especially a loan, into marketable securities, typically for the purpose of raising cash by selling them to other investors.
“The real estate sector development is important to creating jobs for both the skilled labour and unskilled labour, so any policy that frees more money to the real estate sector will have a multiplier effect on the economy of being able to provide job opportunity for artisans, professionals and also provide investment opportunity through securitisation for investors, hence deepen the market,” Ayo Akinwunmi, head of research at FSDH Merchant Bank, told BusinessDay.
The CBN has also moved the financial inclusion target from 80 percent in the year 2020 to 95 percent in 2024.
On exchange rate stability, the governor said the CBN would continue to operate a managed float exchange rate regime in order to reduce the impact which continuous volatility in the exchange rate could have on the economy.
“We will support measures that will increase and diversify Nigeria’s exports base and ultimately help in shoring up our reserves,” he said.
Reacting to this, Khan said continuation of a managed float has largely been anticipated by investors.
“While the need to preserve relative FX stability means that policy cannot be as loose as would otherwise be the case, this has not precluded the CBN from financing government,” Khan said.
Emefiele said the current enrolment of 38 million unique banking customers will be expanded to 100 million over the next five years, adding that ongoing partnership with NIMC would also enable integration between the two databases.
He further announced plans to aggressively implement the CBN’s N500 billion facility aimed at supporting the growth of non-oil exports, which will help to improve non-oil export earnings.
“We will launch a Trade Monitoring System (TRMS) in October 2019, which is an automated system that will reduce the length of time required to process export documents from 1 week to 1 day,” he stressed.
On targeted development finance, Emefiele said building on the success of Anchor Borrowers Programme and other intervention programmes geared towards supporting the growth of the agriculture and manufacturing sectors, and in keeping with the recent presidential directives, the CBN intends to boost productivity growth through the provision of improved seedlings, as well as access to finance for rural farmers in the agricultural sector, across 10 different commodities – rice, maize, cassava, cocoa, tomato, cotton, oil-palm, poultry, fish, and livestock/dairy.
The choice of these 10 crops is driven by the amount spent on the importation of these items into the country and the over 10 million jobs that could be created over the next five years if efforts are made to expand cultivation and processing of these items in Nigeria, he said.
“We believe these measures will help to boost not only our domestic outputs but also improve our annual non-oil exports receipts from $2bn in 2018 to $12bn by 2023,” he said.