CBN to Shore Up Banks with External Reserve
N25bn Capital
By Samuel Famakinwa
The Central Bank of Nigeria (CBN) has said it has decided to use some of the funds in the country's external reserve to shore-up local banks at the end of the on-going strengthening and consolidation exercise in the banking industry.
Speaking yesterday at an interactive session with media executives in Lagos, Governor of the CBN, Professor Charles Soludo, said that the major reason why "we continue to place our reserves in foreign banks is because they are small".
He said for now, "we can not give our reserve to local banks. We place them in foreign banks but can not give local banks because they are small".
He stated that the new N25 billion capital base requirement is just one of the measures, out of many others, being put in place to ensure a proper development of the Nigerian banking system and "on our part, we will use external reserve" to shore up local banks.
Presently, First Band and Union Bank hold some of Nigeria's external reserve in their overseas branches but "it may be extended to other banks after this consolidation exercise as they would have become players at a global level and can hold such large amount of funds", says a senior CBN official.
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 can not compete with foreign banks because they are "just too small".
According to Soludo, "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 added.
Soludo disclosed that by December 31, 2005, the CBN would publish the names of the banks that it can vouch for and would then encourage depositors to patronise them.
"But really after we have done this, anyone can put their funds anywhere they like. But we are going to publish the names of only the banks we can defend their health and credibility. It is then left to people to take a decision where they want to put their money", he added.
He said 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.
The CBN had last week raised the minimum paid up capital of banks to N25 billion which the banks are expected to fully meet by December 31, 2005.
Soludo who announced the new policy measure, among 13 others, said "only the banks that meet the requirement can hold public sector deposits and participate in the Dutch Auction System (DAS) by end 2005."
With this development, the CBN pushed up banks' capital requirement by 1150 per cent from its present position and the banks have a grace period of 18 months to meet the target "rather than 12 months normally given in many countries."
However, there were mixed reactions to the new policy direction by industry operators and commentators. While some welcomed the directive, others said the time frame for compliance was rather short.
Also, the CBN said it would embark on phased withdrawal of public sector funds from banks starting this month just as it vowed to adopt zero tolerance in banks' rendition/reporting of their returns.
Soludo said 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.
According to him, "we 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."
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