THE INEVITABILITY OF INCREASING BANKS CAPITAL BASE

 Sonny Iroche argues the need to strengthen banks’ capital base to prevent failures

The recent sharp devaluation of the Naira, the harmonization of the multiple exchange rates and the removal of the fuel subsidy have had a significant impact on Nigeria’s economy, leading to various challenges such as potential loan defaults, credit shortages, and banking crises. To mitigate these repercussions and support economic growth, it is crucial for the Central Bank of Nigeria (CBN) to reassess and as a matter of urgency, and consider raising the capital base of Nigerian banks, from their existing levels.

This anticipatory and preemptive action of increasing capitalization and encouraging mergers and acquisitions within the banking system will be necessary measures to prevent bank losses and possible failures. The ongoing economic crisis in Nigeria  has accentuated the vulnerability of Nigerian banks, especially with their current capital when juxtaposed with the US dollar value and the very high ticket items that the country should be doing going forward, such as investing in the power and energy sectors, in order to position them to drive the economy.

To ensure their stability and ability to support economic growth, the CBN must proactively anticipate and prevent potential banks failures, by strengthening them. This can be achieved by diligently reassessing and immediately raising the capital base of Nigerian banks, as well as encouraging mergers and acquisitions, amongst those that could find it difficult to raise their capital either through Rights Issues or the injection of new capital, within the banking system.

The Banking  Supervision and the Risk Management departments of the CBN, should now upscale their regulatory functions and supervision of the banks at this critical period. They should perform stress tests to ensure the stability and strength of the banks. Nigerian depositors cannot at this time, be made to go through any banks failures.

Therefore, the CBN, while weaning itself of the recent past mismanagement and plundering of the institution, should tread the new path of playing its key statutory roles and functions of a responsible Central Bank, by anticipating and prioritizing some of the following:  Preparation for economic crisis management:  By raising the capital base of Nigerian banks, to at least N1trillion, the CBN can better prepare them to withstand these challenges. Increased capitalization will provide a buffer against potential losses and enable banks to continue lending and supporting economic activities.

Support for economic growth: Foreign Direct Investment (FDI), local manufacturers, large corporations, and small and medium enterprises (SMEs) are crucial for economic growth of any country, and now more than ever before for Nigeria. However, the ongoing economic crisis has put these entities at risk. By reassessing and raising the capital base of Nigerian banks, the CBN can ensure that they have the necessary resources to support FDI, provide loans to local manufacturers and large corporations, and facilitate access to credit for SMEs. This support will contribute to economic growth and stability.

Encouraging mergers and acquisitions: As some of the tiers 2 and 3 banks in the country may be struggling and have difficulties in attaining the new capital base of banks. These categories of banks should be midwifed to mergers and acquisitions.

The CBN should implement policies that will encourage mergers and acquisitions within the banking system. This approach will not only strengthen the capital base of banks but also enhance their overall stability and efficiency. By merging weaker banks with stronger ones, the CBN can prevent potential failures and consolidate resources to better support economic activities.

The need for reassessing and raising the capital base of Nigerian banks is evident from the current state of the banking sector. Despite Nigeria’s status as one of Africa’s leading economies, it does not rank among the top 10 banks on the continent in terms of total capital. This indicates a significant gap that needs to be addressed to ensure the stability and competitiveness of Nigerian banks.

Furthermore, the economic crisis may lead to loan defaults and credit shortages. Without adequate capitalization, banks will struggle to recover from these losses and continue providing loans to support economic activities. By raising the capital base, banks will be better equipped to absorb losses and maintain their lending capacity.

In a nutshell, it is crucial for the CBN to reassess and raise the capital base of Nigerian banks. This measure will prepare banks for the repercussions of the ongoing economic crisis, such as potential loan defaults, credit shortages, and banking crises. Additionally, encouraging mergers and acquisitions within the banking system will further strengthen the stability and efficiency of banks. By proactively anticipating and preventing bank losses and failures, the CBN can support economic growth and ensure the stability of Nigeria’s financial sector.

X (Twitter) @IrocheSonny