Friday, February 23, 2024

Recapitalisation: Many banks may fail to meet target, collapse – Experts predict

BY TIMOTHY AGBOR, FESTUS OKOROMADU AND BRIGHT JACOB

Financial eggheads have described the intention to raise the capital base of Deposit Money Banks in line with the pronouncement of the Governor of the Central Bank of Nigeria, Olayemi Cardoso, as a step in the right direction.

Cardoso, while speaking at the 58th Annual Bankers’ Dinner organised by the Chartered Institute of Bankers of Nigeria in Lagos on Friday, announced the apex bank’s intention to carry out a fresh round of banking recapitalization for the Deposit Money Banks.

The planned recapitalization means that DMBs will be required to raise additional capital to meet the demands of Nigeria’s economy.

Cardoso highlighted that in his report to the Policy Advisory Council on the national economy, President Bola Tinubu set an ambitious target of reaching a $1 trillion Gross Domestic Product by 2030.

Reacting in their separate interviews with The Point, economists and financial experts welcomed the recapitalization policy and commended the CBN.

However, the analysts noted that for the recapitalization effort to fly, the apex and commercial banks in the country must reduce the interest rate which they described as very high and inhibit investors and small scale business owners from accessing loans.

“If the politicians will allow him to implement those things I think we are on our way out of our quagmire”

They also emphasized the need for the Federal Government to improve on electricity supply, saying that if investors would develop interest in the country, the power supply needed to be improved upon.

In striving to meet the recapitalization, experts said that some commercial banks may need to collapse, adding that those that cannot cope would fold up.

Justifying the essence of the recapitalization plan of CBN, a financial expert, Yinka Anjous said because the value of money has drastically reduced over the years, there was a need for commercial banks to increase their capital base in order to meet the growing needs of those interested in getting loans for business and investments.

According to him, “Recapitalization of banks is necessary, one, due to the fact that there is what is called time value of money, that is, overtime, the value of money has reduced. If you recall in our own days, we were spending one penny and our own penny had four divisions.

“As I speak now, nobody is spending coins again. That is what is called time value of money. That is, the value of money dropped, overtime. So, it means, whatever capitalisation banks have now, time has eroded it.

“Two, there is what is called exposure in banking. Every bank must lend and in most cases, you don’t get back everything you lent out. That means a bank must be properly capitalised to absolve the pressure so that when you cannot receive everything you lent out, you now debit your profit and loss account which we call income statement, to write-off bad debts. If you don’t have enough capitalisation, you cannot do that.

“The third reason why we need to recapitalize is that banking is an international business and you cannot remain in Nigeria and say you are doing banking. If you compare the capitalization of banks now to other banks in the world, it is nothing to write home about.”

On how it would affect the economy positively and impactful the $1trillion dollar economy projection, Anjous opined that, “It will benefit the economy because we are to lend money and the only way people can have business running is for them to have access to funding and the major avenue to get funding is through the banks.

“In fact, the major reason why banks are licensed is for them to intermediate between the surplus and deficit unit; that is, a bank must lend, if a bank does not lend, they will withdraw its licence and for a bank to lend, it must be strongly capitalised so that you will have enough money to lend, giving the fact that you have to properly manage the exposure; that is, the money you have lent will come back because it is not the bank’s money, it is the people’s money; it is shareholders’ funds, it is investors fund, it is customers’ deposits and not banks’ money, they only manage it to make the funds come out and that needs to be capitalized.”

Submitting further, the analyst stated that, “CBN, being the regulator, will make this money available to these banks. It is the CBN that will fix the amount. It has not fixed it yet but it has given banks a notice that there is going to be recapitalization.”

Warning the apex bank against issuing high recapitalization conditions to commercial banks, Anjous posited that some banks would have to collapse to meet the high demand.

“But, CBN should be very careful; it should not give figures that the banks will find very difficult to meet. Soludo (Charles Soludo, former CBN Governor) did that last and it was so impossible to the extent that banks then were consolidating. You will see four, five six banks coming together as one. Banks A, B, C, D, will now merge and become bank Z by choosing another name with the capitalisation figure. Whatever happens, if they cannot make it, they should come together again, we will review the number of banks and they will be strong based on the recapitalization figure.

“So, banks can collapse to meet the consolidation figure,” he stressed.

Advancing on his opinion, Anjous said, “Investors and people who are into small scale business will have opportunity to lend from banks and people will have access to produce.”

Identifying high interest rate and epileptic power supply as the possible challenges the recapitalization effort may face, the expert advocated for improvement of electricity supply in the country.

“For this recapitalization effort to work and produce maximum economic benefits there must be sufficient power supply for investors and business owners to rely on and the interest rate of loaning should be reduced.”

“The Monetary Policy Rate should not be too high because ordinary business will be high, that is the rate at which commercial banks lend from CBN and if it is too high, it will pass to the ordinary people,” he further warned.

Expressing similar thoughts and throwing his weight behind the policy, another financial expert, Joseph Aseda, said, “The truth is that Nigerian banks need to recapitalize because the level of their capital has been devalued; by the time you “dollarize” their capital base, it will be nothing. Their capital base right now is one that is obtainable 15 years ago in real money time.

“For them to meet the demands of the industry, they have to recapitalize because they cannot be behind in the economy.

“For a while, the CBN has been coming to their (commercial banks’) aid through borrowing so often and any shift in the monetary policy affects their operations and that is why they increased their interest rate. Now, the banks have increased their own interest rates in line with that because they are so dependent on CBN. That is why CBN is saying three commercial banks have to take care of themselves.”

Disclosing the challenges that the policy might confront, Aseda averred that, “My problem is that they have to mop-up money, some of them have to take new investors from outside the country and it will be an inflow of forex, and in case they cannot, they have to open their options by selling shares. Selling shares to the Nigerian public means they are going to be mopping money.

“I think it is going to exacerbate the situation in the country as regards inflation. Now, you are taking money away from the system at a time when people don’t have money. Let us hope people who hid money will be able to release it.

“The CBN is saying banks should go and look for money from somewhere else. The interest rate right now is so high that it is difficult for businesses to consider taking loans and they deliberately did that. The cost of production is high in the country and that is why things are expensive in Nigeria. That is not the case in the United States that also has this recapitalization policy.

“The industries are in serious trouble because they don’t have money to produce because materials and other necessities are costly. The overall effect on the economy is not positive.”

Noting that the recapitalization bid is feasible, he said, “It is feasible because there is money outside of CBN that is not in the banks and that money is not in the hands of the people. Maybe with this recapitalization, that money can come into the bank through investments. But it may lead to banks collapsing.

“Recapitalization is doable if the CBN puts its feet on ground and the worst thing is that banks will collapse and another one will acquire the other banks.

“Recapitalization will make Nigerian banks strong and make them capable but the problem is the economic conditions of the country and high interest rates that won’t make it fly. It is just like buying a good engine in a car and driving the car on a bad road, it will develop faults,” the expert submitted.

He urged the CBN to ensure that it releases funds to MDBs at low interest rates and that the commercial banks should in turn reduce their rates for those seeking loan facilities from them.

“I want to task CBN and the MDBs to supply low financed loans because if the interest rate is high, businesses won’t go and borrow.

“If the interest rate is high, our profits will be low. CBN is the author of the high interest rate. The MIR is very high, how can the CBN be borrowing banks at 18 and 19 percent?

Now, people are borrowing at 28 and 29 percent interest rates. It doesn’t help business and investment. People can’t use banks with this. The banking industry is not going to be effective with the high MIR,” he maintained.

Also reacting, the Chairman and Chief Executive of Maxi Funds Limited, Okechukwu Unegbu, said the idea is a welcome development but warned that the CBN must do more than merely asking banks to increase capital base.

He stressed the need for a holistic approach that will revamp the whole economy.

Approving the recapitalization move he said that even the banks themselves know that they need to recapitalize as they were no longer strong enough to operate.

He however charged the CBN to exit the control of Micro Finance Banks.

According to him, the MFBs are no conventional banks and hence they can’t be regulated the way the CBN is currently doing which has led to the closing down of many.

He stated that except the CBN addresses some of the critical issues in the financial sector the recapitalization move will not achieve its set objectives.

According to him, if the CBN allowed the MFBs to operate as they are designed to be they would reduce the pressure in the financial system.

He wondered why the CBN should grant licenses to MFBs to operate in the urban cities instead of the rural areas where they are supposed to be and cultivate the citizens there to help build the financial system.

Unegbu also expressed concern over the impact of politics on the proposed recapitalization initiative, wondering if the political class will allow Cardoso implement his plans.

“If the politicians will allow him to implement those things I think we are on our way out of our quagmire,” he said.

Asked if he is confident that the Nigerian capital market can support the mobilization of funds in respect of the proposed recapitalization initiative, he said much needed to be done for that to happen.

“It is unfortunate that the capital market is no longer doing the roadshow they used to do that attracts funds to the market. What might likely happen is that if the capitalization is increased, there are two options if you cannot raise the required capital, it’s either you exit or you merge with other banks or some may be acquired by bigger banks or financial institutions, these are some of the things that are likely to happen.”

On what can be done to achieve the desired goals, he said the CBN must give the banks enough time to do the recapitalization.

“The Central Bank must give them enough time to raise the capital. It should not be something you give them one or two months to achieve; he should give them between one or two years to raise the fresh capital.

“If he gives them enough time to recapitalize, anyone that fails to meet the time limit and could not merge or be bought over will have to go,” he said.

Commenting on the proposed recapitalization initiative, the Managing Director/CEO, Globalview Capital Limited, Aruna Kabir, said capital market operators were not surprised at the CBN governor’s move, stressing that it is a welcome development.
The entire capital market at the turn of the new year has been expectant of this, he told our reporter.

“The moment the dollar rate and inflation begin to toe the same line, it behooves on the market operators and the banks to shore up the capital base of the Deposit Money Banks to avoid stories that touch was a necessity like yesterday.

“I believe it is a welcome development from CBN to further strengthen our DMBs in the face and in the wake of the quagmire that has characterized our economy.

“I am also of the opinion that whether these banks want to raise funds via PO or right or private placement, there should be off-takers waiting on the borderline for such opportunities.

“The capital market has been the cheapest form and route to capital formation, and the performance of the market in 2023 has laid the carpet for the success of any issuer approaching the market for any capital market activity.

“On the other hand, from the results of most primary auctions, especially the treasury bills, there is a lot of liquidity in the system that would guarantee to an extent of high degree of success to any DMB coming to the market to raise funds.”

On his part, the Chief Executive Officer of Centre for the Promotion of Private Enterprise, Muda Yusuf, in a ten-point agenda to the CBN governor stressed the need to deepen the financial system.

“It is imperative to deepen the financial intermediation role of the Deposit Money Banks, which is their primary role in an economy. This responsibility entails the mobilization of financial resources from the surplus end of the economy, to the deficit segment of the economy,” he noted.

According to him, “Financial conditions remain very tight for the private sector amid challenges of access and cost of credit.

“Banking system credit to the private sector in Nigeria, as at 2022, was a mere 20.6 percent of the nation’s GDP, as sub-Saharan average of 28 percent and global average of 145 percent.

“Besides, small businesses which account for an estimated 50% of the GDP have access to just about one percent of the credit in the banking system.

“The implication is that the banking system is still largely disconnected from the investing community, especially the small businesses in the economy. Financing gap in the small business space has been estimated at over N600 billion.”

On the need to increase the capital base of Nigerian banks, Yusuf agreed with the CBN proposal as driven by current reality.

“The minimum capital requirements of the banking industry need to be reviewed in the light of the considerable loss of value amid depreciating domestic currency,” he stated.

Buttress his point, he said, “During the banking consolidation exercise of 2004, the minimum capital requirements for banks was raised from N2 billion to N25 billion. The revised capital requirement was an equivalent of $187 million. “Today the same N25 billion is an equivalent of just $32.5 million. This is a clear indication of the phenomenal erosion of the capital base of the banks. Recapitalization of the banks has therefore become imperative. It is important to ensure that the capital base of banks can support their current exposures in the interest of the stability of the financial system.”

JOB CUTS LOOM

An Asset Manager, Solomon Usanga, said the policy would make most banks to get into “panic mode” as the exercise would likely expose banks that are currently “struggling”.

Usanga also said that even though the plan for recapitalisation was feasible and would impact the economy positively, he noted that it would also most likely lead to job cuts.

“I believe that most of the banks would have gotten into panic mode by now. I still vividly recollect all that happened in 2005 when Soludo’s CBN put forward the reforms to consolidate the banking sector.

“Soludo had increased the minimum capital base of commercial banks from N2 billion to N25 billion and the domino effect of that policy reverberated in the sector.

“Personally, the effect that resonated the most with the common man was the serious job cuts that trailed the process, and I see this happening now during Cardoso’s recapitalization that will be kicking off soon.

“Some big banks which merged or acquired smaller banks laid off most of the members of staff of the smaller banks who possessed Ordinary National Diplomas or polytechnic certificates. These OND holders were among those who bore the brunt of the banking reform and because of the new CBN Governor’s announcement, I see impending job cuts,” he said.

Usanga also said that recapitalization would foster healthy competition among banks but that the number of banks would reduce because of possible mergers and acquisitions.

“I don’t think the CBN has told us what the new recapitalization figure will be which Nigerian banks must meet. Hopefully, it will be a figure they can meet up with before any given deadline.

“Ability to meet up with it will differentiate us from the banks that can meet up with the figure on a solo basis and those that will be able to do so through mergers.

“But I know that the number of banks will reduce. If I remember correctly, it reduced from about 89 to 24 banks in 2005 and even as the years went by, that number of banks kept reducing.

“But one good thing is that all this will promote healthy competition among surviving banks and you will notice this when you go to the banks and spend shorter hours there,” he said.

In terms of its feasibility, a Port Harcourt-based financial expert and former banker, Umar Ndagi, said the CBN was the regulator and banks would have to comply with any order from the apex bank or risk having their licenses withdrawn.

Ndagi also said that even if some recapitalization moves, like that of Soludo’s in 2005, were government-induced, two or three banks could come together and merge to achieve the required capital base as instructed by the regulator.

“So, banks can achieve recapitalization either through mergers and acquisitions or through consolidation, which is letting off stake in the bank by selling shares or accepting private investors into the bank which of course will neutralise the existing owners of the bank,” he said.

“Without credit, there is no way you can achieve a $1 trillion economy, considering the fact that we are currently on about $450 billion”

On how recapitalization will impact the economy positively, Ndagi said, “You know every economy is usually driven by credit.

“The government initiates policies that will prop up growth and development and once they have the right policies in place, it then becomes incumbent of micro and macro enterprises to drive these growths, and they will do it by way of credit.

“So, if the banks can be made to increase their capital base by way of consolidation or recapitalization, it means they will have more money to pump into the economy and that can easily trigger or accelerate our journey towards that $1 trillion-size economy the CBN is envisaging.

“Without credit, there is no way you can achieve a $1 trillion economy, considering the fact that we are currently on about $450 billion.

“So, you are thinking of an astronomical growth of about $500 billion. That will require a lot of creativity and smartness,” he said.

An economist, Uche Uwaleke, also said that the idea of recapitalization of banks is a welcome one.

Uwaleke, President, Association of Capital Market Academics of Nigeria, said “It goes without saying that capital is needed to finance big-ticket projects, especially when the government is targeting a one trillion dollar economy in a few years’ time.

“Also, if the experience of 2005 is any guide, the recapitalization exercise is likely to rejuvenate the stock market.

“But I think the strategy should be somewhat different from the approach adopted in 2005. It should be more about incentives than coercion.

“Some DMBs (especially many in the FUGAZ category) are already making efforts to increase their capital base.”

He said that the CBN could use prudential guidelines to strengthen the present tiered arrangements.

Uwaleke said the use of the CAR (the ratio of a Bank’s capital to risk weighted assets) was a good example.

“The apex bank can also use differential cash reserve requirements as well as preferential participation in the forex market for well capitalized banks as some of the incentives.

“For whatever it is worth, smaller banks playing at the regional level should not be regulated out of existence,” he said.

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