Increase in banks’ capital base may not help businesses, say operators

Increase in banks’ capital base may not help businesses, say operators
Godwin Emefiele, CBN Governor

As welcome as the Central Bank of Nigeria (CBN’s) plan to recapitalise local banks to be in tune with current realities amid increases in exchange and inflation rates, such a move may not really improve lending to the real sector to bolster enhanced economic activities as being anticipated, operators have said.

This is because banks shy away from the “many risks” associated with lending to businesses and prefer to invest in government’s short term and long term borrowing through Treasury Bills and Bonds, for higher yields, thereby denying entrepreneurs the requisite funding to retool and expand operations that will boost growth in the nation’s gross domestic product (GDP).

The CBN Governor, Monday, announced that part of his plans for his second-term, five-year tenure would be to shore up banks’ capital base to make them more globally competitive, as well as enhance lending to businesses, particularly the small and medium enterprises (SMEs) to enhance government’s economic diversification agenda.
However, real sector operators and other market watchers believe nothing much might change even with higher capital base, given banks attitude towards businesses.

Specifically, the Director-General, Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, told The Guardian: “There may not be any significant impact on real sector lending. The biggest issue with the real sector lending is the high credit risk to the sector, and the CBN plan did not address this. The SMEs segment also worries about high interest rate and absence of long term funds, so Capitalisation review will not fix these problems.”

Agreeing, a former President, Manufacturers Association of Nigeria (MAN), Frank Jacobs, noted that although higher capital will imply more liquidity available for lending, “but the attitude of the bankers have not changed, and that won’t change where they don’t really support the real sector of the economy. So, I don’t think anything would really change.”

Besides, Jacobs, a vintner and Managing Director/Chief Executive, Jacobs Wines, noted that increasing banks’ capital is not the real issue, but actually mopping up the capital from investors/shareholders.

“The problem in the banks might not be capital because increasing the capital base will require more injection of funds into the banks, and that might be difficult because people don’t have the disposable income for it,” he said.
Notwithstanding that the CBN has not prescribed and amount or when the exercise might take place, but analysts have called for caution, even as the Chartered Institute of Bankers of Nigeria (CIBN), President, Dr Uche Olowu, noted that
“adequate capital requirement is relative and depends on the level of activities the bank is involved in.”

Yusuf, while lauding the move, saying: “It would strengthen the capacity of banks to support the economy better, especially with regards to large projects and bolster their capacity to withstand macroeconomic shocks,” cautioned that “the recapitalisation programme should be undertaken in the manner that would not inflict damaging disruptions to the banking system. The process must be properly thought through to ensure minimum shocks on the financial system. Care should be taken not to trigger a confidence crisis in the banking system.”

Similarly, a development economist and former banker, Tope Fusua, argued that increasing the minimum capital base means increasing banks’ risks, which at the end of the day could be counter- productive. Rather, he urged the CBN to be more efficient in its regulatory role by making banks play their role of intermediation in the society as in other climes.

He said: “I read between the lines, and I believe the CBN wants banks to sit up just in case it calls for more capital. Personally, I don’t think we should be embarking on another consolidation process, because we can see that capital inadequacy is not the problem we have in our banks. The more the capital we ask our banks to put up the higher the risks they seem to be taking.”

He further recalled, “After Soludo’s 2005 consolidation, we had to put up over N600 billion to bail out a few banks that were deemed too big to fail. Then we created AMCON in 2010/11, to again bail the banks out with about N6trillion of sticky loans, which are still sticky at AMCON. Now, some economic advisers are calling for AMCON 2 already, since they have seen how easy it is to bail out banks with taxpayers’ money; it’s unfortunate.

“By 2012, we had gone back to the old era of specialised banking, and we now have a few merchant banks. Fintechs are also in the space already giving the banks some challenge and they cannot be ignored. So, I will advise that we not go down the route of another consolidation. We should think deeper and find a way to get our banks to not to lose their heads and to get Nigerians especially those who do big business to have a better credit culture. The problem of high non-performing loans (NPLs) is usually due to moral hazards like insider loans and others.”

In terms of actually raising the capital from the investing public, the Chief Executive Officer, Nigerian Stock Exchange (NSE), Oscar Onyema, said the market is still studying the import of the CBN proclamation.

According to him, “Historically, if you look at the last recapitalisation efforts for the banking sector, the capital market was greatly used for raising the financing.

“Indeed, it was beneficial to the capital market to the extent that the market became more sophisticated, a lot more bears came into the market, and investors’ perspective; and till today, the financial sector is still one of the most liquid sectors that are listed on the Stock Exchange.

He noted, “We know that potentially, it will be very beneficial to the stock market, but we don’t know what the pronouncement means but it will be premature to comment on it. Other than to say we are studying it”, and we need to engage and see how we can serve as a trusted partners in implementing the recapitalisation.”

Also, Chief Executive Officer, RMB Nigeria/Regional Head, West Africa, Michael Larbie, argued that Nigerian banks are as strong as their balance sheets. “The capacity to lend to industry to the sector is also depending on the capital you have. In my mind, it is very good for the economy. Being big is one thing, but having the right asset in the right investable industries and the right sector to lend to be another thing entirely. Well-capitalised bank is good for the economy, and when the capital raised is deployed prudently, it will go a long way to creating more industries, and supporting the economy properly.”

Beyond recapitalisation, Deputy Managing Director, Afrinvest (West Africa) Limited, Victor Ndukauba, told The Guardian that what is required urgently is for better coordination between the fiscal and monetary policies managers.

He asked: “Is there some sort of coordination happening between the Ministry of Finance, in charge of fiscal policy and determine whether it is tending towards growth and the CBN, which is managing monetary policy, guiding through statistics in terms of National Planning, the Budget Office to ensure how much do we put on the Government balance sheet? How much do we need to bring the private capital in? How Nigeria should get in sync with the world? Besides, Udukauba noted that “the global capital market is just one; and they are looking for opportunities and comparing one opportunity with another.”

As such, “If we recognise that we are competing for capital with other countries that are also reforming, and taking very concrete steps towards achieving stability and positioning themselves as destination for capital, then we really need to get our acts together, and very quickly. This is because our population is growing too quickly, and if we don’t position ourselves, the insecurity that we face now will become a big nightmare in a few years,” he warned.

The Guardian

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