- IMF’s recommendation that our banks should be recapitalised seems sensible
Last week’s call by the International Monetary Fund (IMF) on Nigerian banks to raise fresh capital to shore up their operations brings back memories of the 2005 banking consolidation. At the 2017 Chartered Institute of Bankers of Nigeria’s (CIBN) investiture in Lagos, IMF Senior Resident Representative and Mission Chief for Nigeria, Amine Mati, admonished the Central Bank of Nigeria (CBN) to consider asking the country’s lenders to recapitalise. His words: “We believe the banking sector should be strong to support the economy. So it is important we recapitalise the banks to make sure that they are very strong”.
Twelve years after the CBN-ordered consolidation which shrunk the motley assembly of lenders from 89 to 25, it is a measure of how far the financial services sector is yet to come to its own that the same pill is being proposed. However, if the call is any window into the state of the nation’s existing 21 commercial, four merchant and one non-interest banks, that the IMF is the one drawing attention to what should ordinarily be a routine regulatory action can only imply that the regulator is either unaware or is, for whatever reasons, unable to do something about the situation.
Truth is that the exigencies cannot be any clearer. Nigeria’s macroeconomic environment has undergone dramatic changes since that 2005 capitalisation exercise to merit a review of the structure of the industry. For instance, the naira then exchanged for N130 to the United States dollar as against the current exchange rate of N305. As if the quantum of depreciation in asset quality is not grave enough in an industry that is at best fragile by global standards, it would appear that the lessons from the gale of sanitisation which swept the industry in 2008/9 have largely gone unlearned few years down the road.
We refer here to the industry-wide abuses of credit guidelines, particularly the insider-related credit which resulted in the unprecedented build-up of the toxic loans portfolios of the banks, and which threatened to take the entire industry down. Presently, the surge of non-performing loans continues to represent an ever present danger to the economy. Only in August, the IMF had found that: “non-performing loans increased from six percent in 2015 to 15 percent in March 2017” – a development largely blamed on the banking system’s exposure to the oil and gas sector. One other revelation by the IMF is that four of our banks are actually undercapitalised.
To the extent that the banks represent a critical pillar without which the economy cannot function, we cannot agree more with the IMF on the need to keep them adequately capitalised. What is debatable is whether what the industry needs now is another frenzied, industry-wide exercise like the 2005 one as the IMF appears to be suggesting, particularly so when regulatory challenges remain daunting.
Moreover, we see the issue of adequacy as a relative thing. Yes, the CBN might consider raising the threshold for players who choose to play in the big league – and we see nothing wrong with the apex bank encouraging some of our banks to play in that cadre; due consideration however must be given to regional players to develop and grow their niche markets.
The point really is that raising banks’ share capital guarantees nothing. If anything, it is only a means to an end – which is banks’ ability to avail businesses of credit. Merely from our experience, we have seen that capital adequacy does not guarantee improved access to credit let alone cheap one; nor does it curb banks’ propensity to grant questionable loans, otherwise we would not be talking of the huge non-performing loan portfolio. Without adequate and effective regulatory oversight, a well-capitalised bank may be no more than a gambling house in the end.
