• Banks’ recapitalisation won’t cause dislocations
• Refocused CBN to engender trust, stability
• Markets await final regulations
Finance and economic experts yesterday expressed optimism that the new monetary and macroeconomic policy direction announced by the Central Bank of Nigeria (CBN) would lead to a more virile financial sector and long-term stability and growth of the Nigerian economy.
Experts who reviewed the key policy thrusts of the monetary and economic outlook presented by the Governor of Central Bank of Nigeria (CBN), Mr. Olayemi Cardoso at the weekend, were unanimous in their endorsement of the key policy changes, although many called for careful implementation plan to avoid unintended consequences.
Cardoso, as the keynote speaker at the 58th Annual Bankers’ Dinner and Grand Finale of the 60th Anniversary of the Chartered Institute of Bankers of Nigeria (CIBN) at the weekend in Lagos, had used the occasion to outline major reforms and his priorities at the helms of the apex bank.
The occasion, aptly tagged ‘Governor’s Day’ is traditionally use by the apex bank chief to review economic direction and project outlook, as a primary guidance to key decision-makers. It was Cardoso’s first comprehensive policy statement since assumption of office in September 2023.
The CBN Governor outlined plans to recapitalise the banking sector, stabilise the foreign exchange (forex) market, improve access to amenable credits, refocus the apex bank on its core mandate of price stability away from the previous foray into unrelated quasi-fiscal activities, curb inflation and improve living standards through new well-coordinated monetary-fiscal policy measures, engender stable policy thrusts for macroeconomic stability and safeguard the integrity and autonomy of the apex bank.
Experts who spoke included Managing Director, Arthur Steven Asset Management, Mr Olatunde Amolegbe; Managing Director, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf; Managing Director, APT Securities & Funds Limited, Mallam Garba Kurfi; President, Association of Capital Market Academics of Nigeria, Professor Uche Uwaleke; Managing Director, Globalview Capital Limited, Mr. Aruna Kebira and Managing Director, HighCap Securities, Mr. David Adonri.
The experts agreed on the imperatives of the recapitalisation of the banking sector, forex stability, redirection of the apex bank to its core mandates and rebuilding trust in the central bank among other policy thrusts.
They however expressed cautions that the nuances of the expected regulations and implementation plans would play major roles in the overall outcomes of the policy changes.
Experts also expressed optimism that banking sector recapitalisation would not lead to any major dislocations as Nigerian banks and the capital market are in better position to realise the recapitalisation agenda.
Amolegbe, a leading investment banker and former president of Chartered Institute of Stockbrokers (CIS), said the policy statement by the CBN was altogether a well, thought-through package with several policy changes that could help to rejuvenate the financial sector and the economy generally.
According to him, with the CBN back to its orthodox function of price stability and stability of the banking system and the changes in monetary management, the naira will witness medium to long-term stability.
He noted that a review of banking system to ensure players comply with the terms of their licenses will bring sanity to the financial ecosystem.
He said that with the daily meeting of the apex bank’s experts team on financial system liquidity and stability, the CBN would be sending positive signals of readiness to address emerging issues promptly.
Yusuf said banks’ capital requirements were due for review in the light of the considerable loss of value amid depreciating domestic currency.
“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,” Yusuf said.
According to him, it is imperative to deepen the financial intermediation role of the deposit money banks, which is their primary role in an economy, such that they can mobilise adequate financial resources from the surplus end of the economy, to the deficit segment of the economy.
“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 per cent of the nation’s GDP, as sub-Saharan average of 28 per cent and global average of 145 per cent. Besides, small businesses which account for an estimated 50 per cent of the GDP, have access to just about one per cent 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. This anomaly needs to be corrected. All these underscores the need to deepen synergy and complementarity between the banking system and the economic players, especially the MSMEs.
“The key metrics of the depth of the financial system include the ratio of financial assets to GDP; ratio of deposit liabilities to GDP; and ratio of money supply to GDP. Nigeria’s rating on account of these ratios is still very low, compared to other emerging economies. Therefore, deepening the financial system for stability is very critical,” Yusuf said.
He commended the rebuilding of trust in the apex bank and inclusion of extensive consultations with relevant stakeholders in the bank’s new strategic underpinning noting that the CBN Governor needs to relate well with stakeholders, both in the public and private sector, without prejudice to its autonomy or regulatory effectiveness.
According to him, consultations and collaborations enrich the quality of monetary policy through beneficial feedbacks and empirical content while the apex bank must observe high standards of corporate governance to preserve its credibility and integrity.
Kurfi noted that banks had started anticipatory capital raising and called for adequate time for the recapitalisation in order to avoid unnecessary complications.
“It will be better if adequate time is given so that banks do not need to rush to the capital market at same time; that will save many jobs and avoid unnecessary mergers because of recapitalisation. The financial market will view his speech as a welcome development, especially the primary market which has been dormant for some time,” Kurfi said.
He said the markets would be expecting more specific guidelines on the issues of forex and inflation.
Uwaleke said the idea of recapitalisation of banks was “a welcome one”, noting that “it goes without saying that capital is needed to finance big-ticket projects especially when the government is targeting a $1 trillion economy in a few years”.
He said the recapitalisation exercise would also likely rejuvenate the stock market, given the experience of 2005.
“But I think the strategy should be somewhat different from the approach adopted in 2005. It should be more about incentives than coercion. Some deposit money banks are already making efforts to increase their capital base.
“The CBN can use prudential guidelines to strengthen the present tiered arrangements. The use of the capital adequacy ratio (CAR)- the ratio of a bank’s capital to risk weighted assets, is a good example. The apex bank can also use differential cash reserve requirements as well as preferential participation in the forex market for well-capitalised 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,” Uwaleke, who advises the National Assembly, said.
Kebira said the capital market had been expectant of the new wave of banking recapitalisation, expressing optimism that the banks have ample opportunities to raise required funds.
“I believe it is a welcome development from CBN to further strengthen our deposit money banks in the face of the macroeconomic challenges. I am also of the opinion that whether these banks want to raise funds through public offerings or rights 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 auction, especially the treasury bills, there is a lot of liquidity in the system that would guarantee, to a high degree, success of any bank coming to the market to raise funds. Against that backdrop, the probability of job losses is remote. We saw what recapitalisation did to the market in 2004. We might actually witness another history of such repeating itself,” Kebira said.
Adonri commended the refocus of the apex bank to its core mandate of price stability and called for complementary policies that enhance the flow of long-term capital directly to the productive sector of the economy.
“CBN had gone astray and the Governor’s determination to bring it back to its core mandate is commendable,” Adonri said.
He however expressed concerns about “the high rate on open market operations (OMO) to manage money supply which may precipitate an inverted yield curve and stifle capital formation”.
According to him, since supply gap is bane of the economy, policies should also be targeted at the flow of long-term capital directly to the productive economy through the capital market.
