The Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, last week, unveiled his five-year banking plans, which included the recapitalisation of the banking sector. According to the CBN boss, the present capital base of N25 billion that came into effect in 2004 under ex-CBN Governor, Prof. Chukwuma Soludo, was no longer sufficient, having been eroded substantially by the weakened naira.
During the 2004 capitalisation of N25 billion, the exchange rate was 100 but now the exchange rate is N360 to the dollar. However, the proposed new capital base is subject to approval by the Committee of the Governors of the CBN.
Apart from the fresh recapitalisation plan, the CBN Governor announced that the apex bank would be committed to ensure single-digit inflation by 2023, five per cent growth, and retain managed-float exchange rate. The CBN would also ensure $12 billion non-oil exports, 95 per cent financial inclusion by 2024 and develop a framework for securitisation of mortgage loans. Under the new plan, the CBN would grow the external reserves, and support efforts to diversify the economy through its ongoing intervention programmes in the agriculture and manufacturing sectors.
The new CBN policy is laudable. It is expected to stimulate the economy if it is adequately implemented. The need for the recapitalisation of the banks cannot be over-emphasised considering the fact that many of them are grappling with liquidity problems. No doubt, the new capital base will significantly make them resilient. However, the fresh capital base may likely pose some challenges to mid-tier or small banks in the industry. This is likely to make some of them to merge and become stronger.
Therefore, there is need for the banks to be recapitalised. A recent Financial System Stability (FSS) report of the CBN exposed their declining assets and the need to strengthen their fundamentals in the critical areas. According to the report, the total assets and liabilities of the deposit money banks had declined substantially in recent years. The report also raised concerns about the liquidity of many of the banks due to Non-Performing Loans (NPLs). The banks’ NPLs increased to N8.17trn in the 2018 fiscal year.
In spite of the need to recapitalise the banking sector, we advise that the process should be gradual. It should be done in a coherent manner. Let it be done with utmost circumspection because the economy is still vulnerable to internal and external shocks. The trade tensions in some parts of the world and the volatility in crude oil prices could adversely affect the fortunes of the banking sector. While the big banks may conveniently meet any fresh capital requirement, the CBN should also ensure the survival of the mid-tier banks through mergers and acquisitions.
For the CBN to achieve the new plan and insulate the economy from potential shocks in the global economy, it must work in harmony with the fiscal authority. We say this because some of the plans cannot be realised without the tacit support of the Federal Government. Let the CBN do more to ensure viable exchange rate regime, stable inflationary environment, more reserves and lower interest rate, among others.
We also support the CBN’s current measures to boost exports through the N500billion non-oil exports intervention fund. Let it expedite action in the disbursement of the facility at lower interest rate. We also support the proposed Trade Monitoring System expected to be launched in October. It is good that the automated system will reduce the length of time required to process export documents from one week to a day.
Similarly, the plan to work with the fiscal authority for improved Foreign Direct Investment (FDI) flows to various sectors of the economy such as agriculture, manufacturing, insurance and infrastructure, is commendable.
Before the banks are recapitalised, the CBN should put in place strategies that will comprehensively address the shortcomings in the sector. The sector is still plagued by deficiencies that could hamper progress in the areas outlined in envisaged plan. Therefore, there is need for adequate supervision of the sector.