Banks' New Capital Base: The Good, Bad and Ugly
By Ayodele Aminu
For the rest of this year and the better part of next year, one issue that would continue to be dominate discussions in the financial circles is the recent Central Bank of Nigeria (CBN) directive that all banks operating in the country raise their capital by some 1150 per cent, from N2 billion to N25 billion (equivalent to $200 million) before December 2005.
Justifying the need for the recapitalisation, Governor of the apex bank, professor Charles Soludo at an emergency bankers' committee meeting in Abuja about six weeks ago stressed the role that banks are expected to play in the development of the economy. And noted that banks have not lived up to expectation because of their weak capital base.
"It became a question of do something now or die, fail to do something, you still die but do something and then have a chance of surviving.
"If we do not do anything today, several banks would go under and we will end up with more job losses, but with this measure, we will end up with more job savings than if we allowed banks to go under," Soludo had said while explaining the need for the new capital.
Besides strengthening the Nigerian banks, the new capital he had explained, is to stem the systemic distress that has continued to rock the system.
He cited some fundamental defects in the structure and functioning of Nigeria's banking system to include dependence on public sector deposit; the neglect of mobilization of scattered deposits in the hands of small private businesses and individuals as reflected in the over N400 billion recently reported by the CBN as currency outside banks, the herding of bank branches in few commercial locations as well as poor corporate governance and inherent insolvencies among others.
The reforms, he stressed are to correct these defects and make the banking system absolutely safe and sound to engender depositors' confidence, strong enough to muster enough muscle needed to finance domestic businesses and entrepreneurial zeal.
Besides, the reforms he had also explained, are to mobilize international capital for the country's development, allow banks to operate profitably at a scale that would enable them exploit scale and scope economies as well as ensure longevity and high returns to their shareholders.
To make banks comply with the directive, which would force some to merge or acquire weaker ones, he said "only the banks that meet the requirement can hold public sector deposits and participate in the Dutch Auction System (DAS) by end 2005."
He said the banks have a grace period of 18 months to meet the target "rather than 12 months normally given in many countries."
He also stated that the apex bank would embark on phased withdrawal of public sector funds from banks and adopt zero tolerance in banks' rendition/reporting of their returns. Already, the CBN had in a communiqu� from its Monetary Policy Committee for the month of June stated that it would embark on a phased recall of N74.5 billion public sector funds from banks
Soludo had explained that the upward review of the capital base forms part of the major elements of the reforms by the CBN in the first phase of the banking sector reforms, adding that the apex bank would publish the names of banks that qualify by December 31, 2005 while those that merge and meet the minimum capital base by March 2005 would be rewarded.
He further explained that mergers and acquisitions especially in the banking industry is now a global phenomenon, citing various countries where mergers and acquisition had taken place.
"It will not be a world for marginal or fringe players. Countries that fail to proactively position themselves today will wake up then to continue to complain of marginalisation. I can see Asia consolidating. I see consolidation in Europe, America and South America. "Consolidation is taking place in South Africa such that one bank in South Africa- Amalgamated Banks of South Africa (ABSA) has asset larger than all of Nigerian commercial banks put together. Malaysia has recently gone through its first round of consolidation whereby about 80 banks shrunk to about 12 within one year.
"In Malaysia, banks were required to raise their capital base from about $70 million to $526 million in one year. In Singapore (with about three million people), banks have now consolidated to about six and further moving down to three with the second largest bank having capital base of about $67 billion."
He, however, noted, "in Nigeria, we have 89 banks with many banks having capital base of less than $10 million and about 3300 branches. Compare this to eight banks in South Korea with about 4500 branches or the one bank in South Africa with larger assets than all our 89 banks."
He maintained that Nigerian banking system remains very marginal relative to its potential and in comparison to other countries -even in Africa.
"We have a duty to be proactive and to strategically position Nigerian banks to be active players and not spectators in the emerging world. The inability of the Nigerian banking system to voluntarily embark on consolidation in line with the global trend has necessitated the need to consider the adoption of appropriate legal and supervisory frameworks as well as comprehensive incentive package to facilitate mergers and acquisition in the industry as well as crisis resolution option and to promote the soundness, stability and enhanced efficiency of the system, " he added.
Speaking specifically a week after he made his famous declaration on bank recapitalisation at an interactive session with media executives in Lagos, Soludo said that the major reason why "we continue to place our reserves in foreign banks is because they (Nigerian banks) are small".
He however said the apex bank would consider placing some of the funds in the country's external reserve in local banks at the end of the ongoing strengthening and consolidation exercise in the banking industry.
Soludo also said that a N25 billion capital base requirement for banks in an economy like that of Nigeria worth $65 billion is not too small, adding that the figure is just "the minimum as we expect some banks to have more than that after mergers and acquisitions".
He said that it is just unacceptable that Nigerian banks cannot compete with foreign banks because they are "just too small".
According to the governor, "what we are expecting at the end of this whole exercise is that we should have banks that will be able to syndicate credit to the system, support agriculture and be a global player."
"We do not need a banking system that is rent seeking. We want a banking system that is sound, reliable and can finance investments and we are going to support that", he declared.
He added that the CBN has the responsibility to ensure that depositors can put their money in any bank in the country and they can go home to sleep without any worry because their money would be safe.
"The earlier we have a banking system that can move the economy, support agriculture, provide funds for investments, and so on, the better for this country", he stated.
He said the CBN would set up technical committee, including international and national consultants to provide free consultancy services to banks intending to merge or that are involved in acquisitions.
"The gamut of incentives and guidelines would be out within one month. We welcome suggestions on the way forward. Banks that merge and meet the minimum capital base by March 2005 will be rewarded," he said.
Just about two weeks ago, the apex bank's spokesman, Mr. Tony Ede also defended the N25 billion minimum paid up capital requirements saying it was in the overall interest of the economy.
"If the CBN had not reacted, many banks would be dying on daily bases and throwing people into the labour market.
"We had to take a proactive action. If we had not taken this action, the country would have experienced the Malaysian crisis that resulted in giving banks a time frame of one year to merge," he said.
He noted that the Nigerian economy has refused to grow because most banks are not strong enough to finance long- term projects.
"Eighty per cent of the type of total deposits held by banks are deposits of between 30 - 90 days, hence they cannot afford long-term lending. Consequently, they finance merchandise, foreign exchange for imports where pay back time is within 90 days.
" How can the economy grow with this kind of short-term lending? But if you are strong and well consolidated you can afford to mobilise the over N400 billion outside the banking system," the spokesman said.
He described Nigerian banks as speculators in banking business, saying that with consolidation and strengthening of the system, the country would become a major player in the global banking business.
"The total assets of all Nigerian banks is just about N22 billion, while one bank in South Africa has $60 billion, so what are we saying? How can Nigerian banks be an African player in this type of scenario?" he asked.
Asked if the CBN was going to reverse itself, Ede emphasized that there was no going back on the directive.
"CBN would not and cannot reverse itself. If it does that, it would have no integrity and credibility. The new directive was a well thought out and planed measure to save the industry and the economy as a whole," he stated.
The Manufacturers Association of Nigeria (MAN) also endorsed the reform policy of the CBN, saying it will broaden the nation's economic base and help to position the real sector.
"MAN believes that the expand the base of the economy as more fund becomes available to support productive ventures.
"We believe the policy is well intentioned and well situated and will help to improve the nation's economy," the MAN president, Engineer Charles Ugwuh said while giving the position of the manufacturers after an Executive Council Meeting of the association last week in Lagos.
He however said that the good intentions of the policy would only materialize if the policy is implemented as conceived to deliver the maximum intended benefits to the economy.
"It is our view that the recapitalisation will inject and dedicate a large new capital into the economy and we anticipate that part of this new capital formation will flow in from reserves held by Nigerians and other investors abroad," he said.
Ugwuh said there were strong indications that about $3 - 5 billion may flow into the country at the completion of the exercise, adding that this will be a tremendous new capital inflow into the Nigerian economy that requires new capitalization.
Similar view was also expressed by the President of the Institute of Chartered Accountants of Nigeria (ICAN), Mrs. Ibironke Osiyemi.
The ICAN boss last week during a courtesy visit to the CBN Governor at the bank's head office in Abuja told him that the association believed that if the CBN policy is well implemented, it will turn the economy of the country around.
She further stated that the N25 billion capitalisation of banks and other CBN reform initiatives, would encourage cooperation among banks, institute corporate governance and discourage one-man bank ownership.
Osiyemi also emphasised that the new policy on capitalisation will be an engine of development of the private and productive sector of the economy.
"If the country continues to sell foreign exchange to bring finished goods into the country as the banks tend to encourage, we will definitely continue to support other people's economies", she said.
But banks chiefs obviously not comfortable with this development at a meeting in Lagos five weeks ago, set up a 10-man panel headed by the President of the Chartered Institute of Bankers of Nigeria (CIBN), Mr. Samuel Kolawole to examine the new directive and provide an industry position for onward presentation to the presidency, Senate, National Assembly and the CBN.
The panel among others had sought an extension of the recapitalisation deadline from December 2005 to 2006 and also canvassed the stratification of banks into three categories with each having different amounts as capital base.
In canvassing the need to stratify banks into Investment, Universal and Mega banks with each having a capital base of N5 billion, N12.5 billion and N20 billion respectively, the panel in a 19-page document titled "Recapitalisation of Bank to N25 billion: Banking Industry's Position Paper," and exclusively reported by THISDAY, noted that currently, the estimated average shareholders' funds for the top ten banks in the economy is N12.9 billion while the industry average is N3.27 billion.
The Chief Executive Officer of Pharex Limited - a credit rating firm, Mr. Eghes Eyieyien, had also canvassed similar suggestion. He had advocated the stratification of banks into three categories with each having different kinds of capital base.
He had stressed the need to stratify banks into Investment, Universal and Settlement banks with each having a capital base of N5 billion, N15 billion and N25 billion respectively.
The Pharex boss who acknowledged that it is good for banks to consolidate through mergers maintained that N25 billion statutory minimum paid up capital for all banks is not good enough.
"Why not stratify banks into three different categories instead of using a one side fits all? A bank like Investment Banking and Trust Company Limited (IBTC) noted for its tack record investment banking
not have more than N5 billion capital base, while others (Universal and Settlement banks) should be allowed to shore up their capital to N15 billion and N25 billion respectively," he said.
While maintaining that raising banks' capital is not the solution to the lingering problems in the nation's banking industry, he harped on the need for mobilizing into the vaults of banks, majority of funds (about N400 billion) outside the banking system.
To drive home their point, the bank chiefs put the industry's shareholders' funds average growth rate for the past three years at 35.26 per cent.
"It is assumed that this growth rate will witness 75 per cent increase by 2006, translating to 62 per cent growth in shareholders' funds. This will raise the shareholders' funds for the top ten banks to about N20 billion. When applied to the industry average, it will raise it to a little above N5 billion.
"Hence mega banks are recommended for N2O billion, while investment banks and niche banks are recommended for N5 billion. Average of the two will be N12.5 billion which is recommended for Universal banks," the panel submitted.
Given this scenario, the bank chiefs recommended that:
� A minimum shareholders' fund of N20 billion should be set for mega banks, which may want to operate as Settlement Banks;
� A minimum shareholders' funds of N12.5 billion should be set for other Deposit Money Banks, which are Universal Banking business;
� A minimum of shareholders' funds of N5 billion should be set for Investment Banks and other niche banks which do not need very high capitalization;
�The period for meeting the new recapitalisation should be 2004 - 2006 phased as follows: 50 per cent of the requirement to be met by December 2005, 75 per cent of the requirement to attained by June 2006, while 100 per cent of the requirement be met by December 2006.
This, according to the panel, "will minimize the negative side effect of the proposed policy and give banks ample opportunity to source for legitimate funds for the recapitalisation exercise."
Nothing that a good number of banks have not even met the current minimum capital requirement of N2 billion, the bank chiefs stated that this category of banks are still undergoing various structural changes which require time for the benefits to manifest.
"The proposed raising of the minimum capital requirement to N25 billion is likely to have adverse effect on the investors as a reduction in shareholders' value is imminent," they declared.
While maintaining that mergers and acquisitions are business imperatives that should not be forced or hurriedly concluded, the panel noted that the Nigerian socio-political and macro economic environment is fraught with a lot of imperfections and inadequacies that make comparison with other countries like Singapore, Malaysia and South African a mere theoretical postulation."
Juxtaposing the development indices in Nigeria vis-�-vis other economies of the South East Asia and South Africa, the panel emphasized that putting the Nigerian economy on the same pedestal with such economies in the choice of policy option should be done with utmost caution.
"The economies of Malaysia, Korea, South Africa, Singapore and Indonesia individually presents stronger features, which can enable each one absorb certain policy shocks including sudden directive to significantly raise the minimum capital base of their banks.
But even at that, these economies accommodate both highly and moderately capitalized banks. The high GDP values of emerging economies derives from contributions of the small and medium businesses, which are usually financed by small-sized banks," they argued.
The panel further noted that "While Malaysia with a population of 23.1 million has a GDP of $104.6 billion and per capita GDP of $4,526.14, the Nigerian economy with a population of 125.8 million has a GDP of only $3.04 billion and per capita GDP of $24.2.
"South Africa, with population of 46.4 million has a GDP of $2321.1 and GDP growth of 5 per cent. Also, Indonesia with a population of 215.2 million has GDP of $38.8 billion, per GDP of $180.3 and GDP growth rate of 3.5 per cent," they stated.
Putting the external reserve of these companies into perspective, the bank chiefs noted that Nigeria with $7.47 billion as at December 2003 has the least external reserve while Korea has $166.5 billion; Singapore, $10.6 billion; Malaysia, $53.9 billion; Indonesia, $35 billion and South Africa, $11.2 billion.
In terms of credit advancement to the economy in these countries, the bank chiefs noted that apart from Indonesia where the Central Government obtained 44.79 per cent of the total credit advanced to the economy in 2003, Nigeria trailed with the Federal Government cornering 32.24 per cent of the total credit to the economy and Singapore 21.5.
These, the panel maintained, showed the extent to which the private sectors in these economies are crowded out of investment funds.
They observed that in spite of the superior strength of the South African economies vis-�-vis the Nigeria economy, the minimum capital requirement for banks in South Africa is $39.06 million, while credit is 5.4 per cent as against Nigeria's proposed minimum capital requirement of $192.3 million and 32.25 per cent credit extension to the Federal Government.
Besides, the panel analysis in terms of electricity generation also put Nigeria at a very disadvantaged position.
"While Nigeria generates 20.18 billion kilowatt hours, Malaysia generates 65 billion kilowatt hours, South Korea generates 52 billion kilowatt hours and South Africa generates 196 billion kilowatt hours," it stated.
Given this scenario, the bank chiefs submitted that the cost of doing business in these economies will be less than that of Nigeria considering that electricity is a major component of the economy.
"It is therefore clear that Nigeria's economy cannot be put on the sane pedestal for comparison with other economies. And even at that, these economies have small banks focusing on their niche areas and carrying on their businesses side by side with the big banks," the panel concluded.
While maintaining that the Nigerian banking industry has contributed significantly towards the economic development of the nation, the bank chiefs listed such contributions to include: offering employment to over 700,000 Nigerians who cater for well over 700,000 dependent relatives; financing of viable private economic projects which have assisted employment generation and production in the economy; carrying out corporate social responsibility activities that have assisted economic development; provision of credit to government to prevent "government failure" as well as enhancing of the small and medium scale industries through the SMIEIS where over N22 billion had been pooled.
Noting that the industry would have been able to do much more but for the harsh operating environment, the bank chiefs listed the effects of the new policy to include: unemployment; oligopolistic tendencies; capital flight; illiquidity and money laundering to mention but a few.
The Centre for the Promotion of Private Enterprise (CPPE) has also called on the CBN to reduce the N25 billion new capital base for banks to N10 billion.
It harped on the need for the apex bank to phase the proposed N10 billion capital base over five-year period.
In a statement signed by its Chairman, Board of Trustees, Mr. Olu Akadiri, the Centre stressed the need for the banking watchdog to be more consultative in its approach to regulatory activities.
"This is essential because, the CBN governor, Professor Charles Soludo coming from an academic background, may not fully appreciate the full implications of some of his actions", the CPPE said.
The Centre also accused the CBN on being inconsistent; saying its monetary policy for 2004/2005 was deliberately meant to cover two years to generate investors' confidence.
"What the CBN has done constitutes a great damage to the country risk rating. If there is anything that worries investor about the Nigerian economy, it is policy inconsistency," the CPPE declared.
Since the apex bank's sudden change in policy direction, bankers especially those that have recently invested heavily in Information Technology to expand their branch network have been having sleepless nights hoping that the CBN would have a change of hearth. But with last week's support of the recapitalisation by President Olusegun Obasanjo who apparently has a disdain for bankers, banks have no other choice than to seek ways of achieving the new capital either by raising additional capital or consolidating.
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