THE BANKS AND THE DEPOSITORS

MONDAY EDITORIAL

There is need to strengthen regulatory rules in the banking sector

There are obvious challenges with many of the commercial banks in the country today. In a period of economic recession, this is understandable given that there is no way the banking industry can be divorced from the environment where it operates. What is, however, unclear is how bad the situation is. That precisely is why many are worried despite the assurances from the Central Bank of Nigeria (CBN) that all is well with the banking sector. We believe there is need to strengthen regulatory rules because if banks failed in the past, they can fail again.

Indeed, both Bloomberg and Moody’s said recently that the banking industry in Nigeria was facing a lot of turmoil and that at least six banks were under severe pressure, requiring them to embark on imminent capital raise. According to Bloomberg, “Nigeria’s banking industry is facing full blown financial crises as failed fiscal and monetary policies lead to a credit crunch”. The international analysts said that the acid tests carried out on some banks revealed that if they were to provide for all their toxic assets, there could be possible deficit of over one trillion naira ($3.2b) in capitalisation.

While the CBN should continue in its role of giving confidence to the economy, it is also imperative that the nation should know the true state of our banks. It will be tragic to live in denial if indeed the situation is dire in some banks as many reports claimed. A cursory look at the economy lends credence to the fact that all cannot be well with the banks. Exchange rates have shot up astronomically in the face of falling oil prices and dwindling crude export volumes. And with that, a lot of the existing credit facilities in the loan books of banks have come under severe pressure, particularly in the oil and gas and power sectors of the economy. Meanwhile, bank stocks are at very low levels such that the entire economy is now bleeding.

To compound the problem, inflation and unemployment are on the rise at a period the Gross Domestic Product (GDP) is on a steady decline. Some banks have reacted by cutting costs and retrenching staff. Many of them now tell their customers that they are not lending. Given all these, it is difficult to sustain the argument that all the banks are in sound health.

However, it is not all doom and gloom as there is some good news. Banking regulation demands that banks keep a lot of capital for uncertainties like this. Elsewhere, as banks implement Basle 3, minimum capital adequacy ratio which measures the degree to which the bank’s capital can take care of its risk weighted assets (loans) has been put at eight per cent. The CBN in its wisdom has kept capital adequacy ratio for banks in Nigeria at higher rates of 10 per cent for national banks and 15 per cent for international banks. This action has given a buffer of between two to seven per cent for banks in Nigeria.

All said, we recommend closer supervision, continuous stress testing and timely remedial actions to ensure against failure of any of our banks. We also believe that the banks in particular and the economy generally will benefit from more sound and stable monetary policy framework. We urge President Muhammadu Buhari to go beyond the current ad hoc approach to the management of the economy by putting in a place a strong economic team that will help him in the efforts to manage the difficult situation we have no found ourselves as a nation.