CBN defends new capital base for banks
By Ade Ogidan,
Deputy Business Editor
THE Central Bank of Nigeria (CBN) may have foreclosed a downward review of the N25 billion capital base recently imposed on the nation's banks.
The apex bank's governor, Professor Charles Soludo, yesterday in Lagos said that the N25 billion benchmark is still low, given the strength of the economy.
But some bank chiefs who spoke with The Guardian, faulted CBN's position. They stressed that the hike in capital base was unfair to operators in particular and inimical to the economy in general, due to unsavoury consequences of such development.
Soludo, in a chat with newsmen, explained that the new capital base would check the fragility of the industry and end lack of transparency and rent seeking among the banks.
He said: "What we have proposed is the minimum. We arrived at the N25 billion figure after due consideration of what the banking industry in the country should be in the 21st century".
"The 18-month period given for the banks to recapitalise is long enough for any serious financial institution that wants to remain in genuine banking business. There are strategic options left for the banks to consolidate. These include mergers and acquisitions, which are very much in vogue around the world," he added.
The CBN governor disclosed that the apex bank had already put together a technical team that would assist banks in the implementation of the policy, as part of its resolve to sanitise the system.
Soludo described the current capital base for banks as too low to enable them cope with the challenges of the economy.
"It is a paradox that despite the size of the economy, we cannot give our reserves to local banks to manage due to their low capacity. We cannot continue with such a situation", he declared.
The CBN governor added: "As at end of June, 2004, there were 89 deposit money banks operating in the country, comprising institutions of various sizes and degrees of soundness. Structurally, the sector is highly concentrated as the 10 largest banks account for about 50 per cent of the industry's total assets and liabilities."
He continued: "Indeed, most banks in Nigeria have a capitalisation of less than $10 million. Even the largest bank in Nigeria has a capital base of about $240 million, compared to $526 million for the smallest bank in Malaysia."
Stressing the imperative of size, Soludo pointed out that South Korea has only eight banks with about 4,500 brnaches while one bank in South Africa has larger assets than all the 89 banks in Nigeria.
"The truth is that the Nigerian banking system remains very marginal, relative to the potentials 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 acquisitions in the industry, as a crisis resolution option and to promote the soundness, stability and enhanced efficiency of the system," he said.
Soludo, while defending new public fund withdrawal policy from commercial banks, said reliance on government funds had over the years, turned several banks into "rent centres".
He said: "Think about this caricature of what would happen under this system. A group of people gets a banking licence, use their connections to garner some billions of naira in deposits from one or two parastatals and use the deposits to trade in government treasury bills, foreign exchange and open letters of credit for importers.
"Such a bank can declare billions of naira in profit. It sounds like a fiction but this describes the situation with many banks in the system. With many of such banks, depositors with balances of less than N50,000 or N100,000 are not welcome.
"Today, we have more than N400 billion as currency outside the banking system. There are many reasons for this, including the large informal economy, but obviously a key reason is the perverse incentive to look mostly to high networth agents for deposits, which include government agencies, blue-chip companies and rich individuals. Again, this is neither sustainable nor healthy for the economy."
But many bank chiefs faulted the CBN position, stressing the wisdom in stratification of financial institutions' capital base, along their respective lines of competencies, strengths and level of risks.
The bank chiefs, many of whom spoke on condition of anonymity, queried the rationale behind the new capital base which they said, would bring about only mega banks that could create imperial features in the country's money market.
They argued that rather than have mega banks' dominance in the financial landscape, a stratification should be `evolved that would accommodate smaller banks under low capital base regime to promote rural banking and proactive funding of small businesses.
The Deputy National President of Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Chief John Odeyemi, while backing improved capital base structure for banks, said a clean sweep of smaller banks could be inimical to the spirit of deregulation in the financial sector.
Odeyemi, who is also the immediate past president of Lagos Chamber of Commerce and Industry (LCCI), pointed out that stratification of banks under differential capital base structure holds the ace in sustaining the existence of the financial institutions, with the concomitant benefits to the economy.
According to him, there could be existence of mega banks with capital base of N25 billion as proposed by the CBN. Some specialised financial institutions like those focused on investment, mortgage, development, agriculture, and SME (Small and Medium Enterprises) be encouraged to exist under a lower capital base regime.
Similarly, on the lowest stratum, community banks could be made to operate under a much lower capital base structure to enable them perform their all-important role at the grassroots.
He said: "We have all been talking about mergers and acquisitions for greater effectiveness in the financial sector. But it was never expected that it would come in a fiat with such gargantuan level of capitalisation.
"The proposed increase in capital base of banks may be a preferred global requirement, but the CBN should note that the country is only about 15 years old in liberalised banking licence regime. The liberalised system has had a lot of salutary effects on the economy as resultant competition bolstered quality of service delivery, despite some hiccups caused by the proliferation of banks and abuses, which the regulatory authorities have ably addressed, especially in the last five years.
"Granting the inherent benefits in having mega banks, like reduction of overhead costs, lower cost of funds and other advantages of economy of scale, disengagement of smaller banks' operations could lead to poor penetration of the rural and informal system in the economic system.
"Therefore, a stratification option is imperative to ensure that gains made from the enthroned competitive regime in the banking industry are not compromised at this stage of national economic development."
He warned that CBN should not lord over an economic model, "which may be good on the drawing board but may be impracticable on the banking floor."
Similarly, a chief executive of a new generation bank cautioned the apex bank over the new proposal.
The top banker, who spoke on condition of anonymity, faulted CBN's clamour for a comprehensive merger and acquisition agenda, saying that the benefits of the existence of smaller banks should not be wished away.
He said: "It is obvious that most banks will not be able to meet up with the new capital base requirement. In as much as we need to sanitise the industry, some credible financial institutions that have created niche for themselves in specialised areas may be adversely affected under the new proposal by the CBN. This is if we take into consideration the time limit allowed for recapitalisation.
"Rather than set in motion an agenda that could eclipse smaller banks, the financial institutions can be stratified along their lines of competencies and strengths. Level of risks being taken should be considered in determining their respective capitalisation levels."
A former top CBN official, who also spoke on condition of anonymity, stressed that the banks should not be compelled to pursue offshore financial alliance option in their recapitalisation bids.
"Strategic offshore alliance option for recapitalisation would lead to foreigners over-running the industry, which may not be good enough for the sovereignty of the nation, despite all the advantages of capital inflow," he said.
