Matthew Otoijagha
Speaking last week Monday in Abuja during the unveiling of his economic agenda for the next five years, the CBN Governor, Mr. Godwin Emefiele, explained that the drop in the value of the naira to the dollar had weakened the capital of banks.
For instance, the apex bank boss recalled that in 2004 when the banks were last asked to recapitalized, the value of a dollar to the naira was about N100. This, he explained, meant that the N25bn capital base of banks when translated into the dollar was about $250m.
However, due to the drop in the value of the nation’s currency which now exchanges for N360 to a dollar, the governor put the translated value of N25bn at just about $75m. Going by this explanation, it therefore, means that the value of the capital of each bank had been reduced by $175m.
Based on the number of Deposit Money Banks in the country which stands at 20, the total value of the capital base may have been eroded by about $3.5bn.
Emefiele said going by the huge developmental role the apex bank would want the banks to play in the next five years, it had become imperative to demand their recapitalization. Following the announcement of the recapitalization exercise, Emefiele said the Committee of Governors of the CBN would meet to discuss the new policy.
The meeting, according to the governor, is expected to discuss modalities for the recapitalization exercise, as well as approve the framework that would guide the implementation of the policy. The governor said during the unveiling of his agenda for the next five years that the recapitalization of banks had become imperative as their current capital could no longer finance large transactions.
He said, “In the next five years, we intend to pursue a program of recapitalizing the banking industry so as to position Nigerian banks among the top 500 in the world. Banks will, therefore, be required to maintain a higher level of capital, as well as liquid assets in order to reduce the impact of an economic crisis on the financial system.
Stockswatch spoke to experts in the financial sector to shed more light on full implications of the new policy on the banking industry, the capital market and general economy.
Malam Kasimu Kurfi MD/CEO, APT Securities Ltd, in his reaction to the news, explained that for him, the CBN plan is a good one. He noted that that there was nothing better than making the plans known to all the operators in the industry at the same time.
‘‘For me, the CBN should come out with a five year working plan, since the CBN governor tenure has been renewed for another five years, it is good for the banking industry to know his plan for the next five years.
If you remember the first recapitalization in the early 2000, when banks were asked to recapitalize to the tone of N20billion, many of the banks were ambushed, but those who got the information earlier like GTB and others, quickly made-up, without any difficulty. By the time the information on recapitalization came out the industry have become so crowded that some banks were left with no choice, but to go into mergers or get acquired.
‘‘But those very few ones that got the information on time got their capitalization easier. I think what they did now is better, let the whole industry be informed of what lies ahead. I believe that to give out the information at the same time is better. Those who plan to remain in the business; they look at the working plan, and they work along the working plan. For me the CBN plan is a good one. There is nothing better than to release the information at the same time.
Remember in the early 90s when there was over 90 banks, most they were private banks, and most of them cannot do a good ticket business. If you approach a bank in the early 90s with a proposal that need N2-3billions, not many banks were able to take a transaction of N2-3billion, and at that time none of our banks was known globally, by the time they were asked to meet the N20billion capital requirement. But today, many of our banks can do big ticket transactions. Today Banks that look like family bank are no more.
The ownership of most of these banks in the country today have been diluted, excerpt for most of these foreign banks, which is due to CBN’s efforts at stabilizing the banks.
Impact of policy on the capital market and economy:
We believe that the current CBN plan to recapitalize banks is a good one. It will make the stock market vibrant once again. Remember that most of these banks are already in the market. So they will go back to the market and seek for additional fund.
I think you cannot separate the market from the economy. We have said a number of times that the federal government which is the leader needs to come out with a blue print of economic policy that is not only known to themselves, but to the Nigerian public. This gives direction to the economy, as well as, provide foreign investors the needed information to make their investment decision.
Earlier this year we had a general election, and it is a well-known fact that election year in Nigeria is troublesome for the capital market. Even after the election, the president has not made any point blank statement regarding the national economy. This has kept most of the foreign investors skeptical about what this government is going to do.
Even though they have renewed the CBN’s governor tenure which represent the monetary aspect of it, but the government need to come with the fiscal policy and to look at the drivers of the policy. This government was elected in February, but today we are at the end of June, but nobody can predict who will be in the next cabinet.
Without this prediction, most of the players remain skeptical about the market, with most of them deciding on a wait and see attitude. Are those to drive the economy capable of doing so? What is their pedigree in economic management; these are questions that need answers, to see if the driver can drive well?
Remember, it is just this week that the president inaugurated the board for SEC and this is one of the drivers of the capital market. You remember we have several issues as regard SEC, most of the issues required the attention of either the Minister or the President. Hopefully, now that they have establish the board for SEC, we hope that SEC will now hit the ground running.
We also hope that the board will do the needful and address all the issues that ought to have been address by the board over the last four years. I expect the board will now work 24hours a week until they address all of these outstanding issues, then we will move forward.
Why the market is down:
The market is behaving the way it is behaving, because the government has failed to come up with a strong policy direction. The drivers of the economy are not known, so these are some of the issues affecting the capital market. You remember in 2016 we were in recession, we just started recovery in 2017. Today, what is our GDP growth rate? We are just projecting 2.2%. In 2020 2.2% is far below are expectation.
In the past, our economy grows as much as 6-7% annually. So, coming to 2.2% annual growth rate is really too low. These are some of the issues affecting the capital market.
We believe if the president comes out with the cabinet on time, and bring the economic drivers back in the cabinet, believe me, six months is more than enough for recovery. Don’t forget that this year we are witnessing many wonderful things. First MTN got listed, with market capitalization of almost N2trn. Now, Airtel is about to be listed with similar capitalization.
These developments are added advantage to our market. It is increasing the depth of our market. The moment we are getting this, then the next will be the drivers of the economy. The moment we get the drivers of the economy right, and the president gets it right; I can assure you that the economy will get better before the end of the year.
Boniface Okezie, President, Independent shareholders’ Association, has this to say in his response: ‘‘The CBN is the one regulating, they have the right to do so, but they have not come out with the circular yet, but if there is the need for the banks to re capitalize, the CBN knows what they need. But, is capital the real problem of the banks? If the CBN is asking the banks to raise equity is this the right time to do so?
‘‘I don’t think if they are asking the banks to raise equity, this is not the appropriate time, they will not be able to do that right now. What the CBN should have done is to prepare the mind of the banks in anticipation of recapitalization.
‘‘In a wobbling economy, such as ours right now, the CBN is asking the banks to recapitalize, I don’t think that is proper. I believe it will not help the economy either. The question we should be asking is: the banks the CBN has taken-over, how have investors recovered from the take-overs of such banks in the past?
‘‘I mean banks like Skye bank, Bank PHB, spring bank, Oceanic bank etc. The takeover of those banks has not gone down well with Nigerian investors. I don’t think any serous investors would want to put more money into their investment, in view of the uncertain economic situation in the country. So, the CBN should come out clearly about what it means by recapitalization.
The CBN need to come out with a clear policy. This policy summersault is affecting even the banks. The banks are not lending to the real sectors that is the truth. So if we recapitalize, what happened in 2007 will repeat itself.
When the then CBN governor, Mr. Soludo recapitalized the banks, the banks did not know what to do with the excess money they had, the banks then resorted to margins loans which almost reined the banking industry and that is what has kept the capital market where it is today.
The CBN need to explain to Nigerians what it means by the new recapitalization policy. Are Nigerian investors expected to go off-shore to get their capital? I think that is the question begging for an answer.
Dele Sanusi, a stockbroker and financial Analyst. He reacted to the development this way: ‘‘The increase in the capital base of the bank to N230bn is going to really help the banking sector because, if you look at the time lag that they have been given, about five years which should be really enough for the banks to really do what is necessary to meet their recapitalization requirement. The time will also be enough for them to make a good balance sheet, so that they will be qualified as standard financial institution to operate in that sector.
The CBN’s plan to recapitalize will affect us positively because the confidence will be increased, not long ago we had Diamond bank going into mergers with Access bank. I believe that the development will encourage others to do something similar to what Access bank has done.
Now, the financial liquidity of the Nigerian capital market can accommodate the needed capital, while banks that may not be able to raise the capital can take the option of a merger like what the Diamond and Access banks have just done, It is better to have 10 very strong banks in Nigeria that can withstand economic shocks, lend better to the society, particularly the real sector, than have 24 banks that can’t add any value to the economy,”
However, we should do it in a systematic manner to avoid chaos, because I know that about three to four banks are facing systemic challenges, which will soon become manifest. So we should encourage mergers and acquisitions to have a smooth exercise.
While opinions may differ on the motive behind the proposed banks’ recapitalisation, Emefiele further listed his major priorities to include: “First, preserve domestic macroeconomic and financial stability; second, foster the development of a robust payments system infrastructure that will increase access to finance for all Nigerians, thereby raising the financial inclusion rate in the country.
‘‘Third, continue to work with the Deposit Money Banks to improve access to credit for not only small holder farmers and MSMEs, but also consumer credit, and mortgage facilities for bank customers. Our intervention support shall also be extended to our youth population who possess entrepreneurship skills in the creative industry.”