A familiar therapy – The Nation

.Recapitalization alone can’t make our banks compete globally

Barely 15 years after the Central Bank of Nigeria (CBN) pruned the country’s 89 banks to 25 in the wave of recapitalization, the apex bank is proposing the same therapy all over again. To Godwin Emefiele, the bank’s governor, that is the way to go if only to maintain financial system stability. His diagnosis, presented at the unveiling of his economic agenda for the next five years, last week, in Abuja, is as familiar as it is interesting: our banks, he stated, are undercapitalised.

For instance, at the conclusion of the 2004 recapitalization, the exchange rate was about N100 to $1. At that exchange rate, N25bn capital base translated to about $250m. At today’s rate of N360 to a dollar, it comes to about $75m – less than a third of the 2005 value. Surmising that the deposit money banks in all may have lost about $3.5bn since then to the devaluation of the naira, he says recapitalization has become imperative as their current capital could no longer finance big ticket transactions.

And as a clincher, he says the apex bank under his watch seeks to pursue a programme of recapitalizing the banking industry so as to position Nigerian banks among the top 500 in the world” in the next five years.

It is hard to fault the push by the apex bank to get the banks to maintain adequate and comparative capital base given how interdependent the global financial system is. It would seem the least it could do to help get the banks to resume their basic functions of supplying the credit necessary to get the economy running. And to be sure, nothing can be wrong with the apex bank’s aspiration to have Nigerian banks play among the elite club on the global level.

Unfortunately, if experience is anything to go by, the plan might end up another instance of chasing after the wind. The lessons ought to be clear by now: there is absolutely nothing sacrosanct about a decreed capital base; the soundness of the financial system is to the extent that the interplay of the forces of regulation, the larger economy and ultimately the exogenous force of exchange rate, permit.

We may have managed – way back in 2005 – to cobble together 24 (one of the 25 banks that emerged after recapitalization later dropped) banks supposedly strong, adequately capitalized banks from a motley assembly of 89; it is a far cry to suggest that the key objectives have been met. In fact, it took barely four years for the exercise to unravel – hence the comprehensive sanitisation needed to be undertaken by the then CBN governor Sanusi Lamido Sanusi in 2009.

Consolidation, therefore, far from being a cure-all pill for the problem, is merely one step in the long journey towards a sound, stable, responsive and responsible financial system.

The natural question is – what has changed between 2005 and now? Certainly not the profile of lending and the attenuated rise in cases of non-performing loans which would seem enough proof of how little has changed in the character of the players. Moreover, with the fragility of the economy constituting an ever present drag on the financial system; it seems only a matter of time before the sector is returned to the very point where it started – a vicious cycle. The latter appears to be the crux of the problem.

We urge the CBN to think through these. An industry-wide classification structure in which players are given the choice of which niche to play would seem far less disruptive to an approach which seeks to herd players into the capital market at the same time, as we had in 2005.

Moreover, as nothing says that all banks must play in the same league; to the extent that an internally-driven consolidation would be far more effective than the one decreed by the regulator, the apex bank should be seen to drive that option as first choice. That is, assuming of course that the apex bank itself is awake to its oversight duty of ensuring capital adequacy of the banks at all times.

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