Insurers Lose Sleep Over Hike in Banks' Capital Base
By Nnamdi Duru
The recent increase in the capital base of banks operating in the country from N2 billion to N25 billion by the Central Bank of Nigeria (CBN) has ben generating mixed feelings among Chief Executives of companies in the sister sub-sector, the insurance industry.
The top echelon of the insurance sub-sector of the finance industry has described the increase in banks' capital base as a welcome develoment but some of them felt it should have been gradual instead of the 1150 percent quantum leap prescribed by CBN.
They feared that National Insurance Commission (NAICOM), the regulator of insurance practice in the country might be tempted to increase insurers capital base by a similar percentage.
Their fear was however, allayed by the Commission which confirmed that there would be increase in insurers' capital base but maintained that capital does not perform the same function in banks as in insurance companies.
Some operators would like the apex banking institution to bow to the wishes of the National Assembly and start with a 400 percent increase or N10 billion capital base for banks just as some others felt that government should rather concentrate on how to shore up the value of the national currency. If this happens, and inflation is curtailed, the hues and cries about the capital base of financial institutions would not be necessary any longer, the argued.
On the impact of the increase in banks' capital base on the insurance industry, some Chief Executives felt that it would be out of place for a local general business underwriter with a capital base of N200 million to provide cover for a bank with a capital base of at least N25 billion.
The Commissioner for Insurance, Dr. Oladipo Bailey in a telephone interview told THISDAY that the increase in capital base of banks is "a welcome development and very good for the country". He acknowledged the fact that not all the existing banks could raise the N25 billion prescribed by CBN given that many banks did not find it convenient or easy to raise the N2 billion required of them before now. He noted that there is proliferation of banks in the system and underscored the need to tidy up the system a bit.
He stated his believe that by this pescription, CBN is encouraging mergers between existing banks and expecting to have between 12 and 18 banks when the new regulation would be fully implemented.
The Commissioner traced unethical practices perpetrated by banks including but not limited to inside dealings, round tripping, and indecency in the conduct of bankers to the cut-throat competition which has its roots in the number of players but advised that the number should be determined by the volume of business available and aimed at stemming the tide of bank failures as witnessed in the nineties.
He argued that the nation's finance industry is yet to witness real growth and development as the nominal increased recorded were as a result of hyper-inflation and rule out the possibility of the reluctance to merge as witnessed during recapitalisation of insurance companies recently recurring saying, "if they are reluctant to merger they will not be reluctant to die. CBN left them with no option, it is shape in or shape out".
On the impact of banks' recapitalisation on the insurance industry, Bailey said, "definitely, capitalisation will not remain same. We are not allowing new companies to come in at this level of capitalisation, insurance companies' capitalisation will go up".
On the percent increase to expect, the Commissioner said that it will not be of the same magnitude with that of banks because according to him, "capital of insurance companies does not serve the same purpose as capital of banks".
He rationalised this explaining that insurance companies depend more on reinsurance treaties as available risks are usually shared between co-insurers and this would increase the capacity of individual companies to underwrite risks.
In his own reaction, the Director-General of the Nigerian Insurers' Association (NIA) and a one time Managing Director of an insurance company, Mr. Ezekiel Chiejina told THISDAY that the increase in the capital base of financial institutions including the most recent hike in banks capitalisation is most desired. This, he said would ensure that bank failures would be reduced to the barest minimum if not eliminated.
According to him, this move would see Nigerians bring in their investments in other countries back into the economy. He explained that Nigerians have a lot of investments outside the shores of this nation and if they are confident that investing in these banks is worth the while, they would without delay re-channel their investments back into these institutions.
He said that already three banks have almost met the requirement while 18 others were on the way to meeting it, confirming that the banks are not complaining against the prescription.
He however expressed the fear that NAICOM might toe the line of CBN in not too distant time from the last recapitalisation exercise in the insurance industry.
The Managing Director of Niger Insurance, Alhaji Bala Zakariya'u in an interview with THISDAY pledged his support for the recent hike in the capital base of banks, describing it as "a welcome development". He maintained that it is another way of saving the Nigerian financial sector from collapsing.
He rationalised the rate of the increase prescribed by CBN saying that the new policy aims at ensuring that small banks operating in the system merge. Merger according to him, would enable surviving banks compete effectively without unnecessary diplication of offices with its costs implication. Cost of borrowing would reduce as a result of reduction in administrative costs of these banks just as synergy achieved from the process would enhance profitability, he maintained.
Supporting the position of the National Assembly on the prescription, Zakariya'u advised that if stakeholders strongly feel that it is too much, CBN should start from N10 billion and may be in the next five years increase it to N20 million.
Zakariya'u who doubles as the President of the Chartered Insurance Institute of Nigeria (CIIN)however maintained that what obtained during the recapitalisation exercise in the insurance industry where mergers were not witnessed was ruled out by CBN, which he said left banks with no option than to merge.
In his reaction, the Executive Director (Finance) of Aiico Insurance Plc, Mr. Henry Omoragbon said, "it is a good intention but very rash". He was of the opinion that the increase should have been graduated instead of increasing it from N1 billion for existing banks or N2 billion for new one to N25 billion at a go.
He premised his argument on the fact that Nigerians are not amenable to mergers, a case he said was established in the finance sector during the recent recapitalisation of insurance companies.
He further advised the apex banking institution to base whatever increment it sought to enforce on the paid-up capital of banks as against convertion of shareholders' funds to avoid abuses and manouverings as was witnessed in the insurance industry recently.
The impact of banks recapitalisation according to Omoragbon is that NAICOM might follow the CBN's lead even as insurers have just concluded a round of recapitalisation with the hope that volume of insurance business would respond positively. The expected increase in business volume he regretted was yet to be witnessed.
For Mr. Eddie Efekoha, Vice-chairman of Consolidated Risks Insurers Limited, the prescription "is on the high side". He said that since banks and insurance companies operate in the same sector and banks are out to raise N25 billion capital, it is bound to have serious implications on insurance.
In his view, if the Senate has advised that the capital base of banks should be pegged at N10 billion for now, CBN and other protagonists of higher capital base should take another look at the issue and let N10 billion be.
On the implication of this hike in banks' capital base on insurance business in the country, Efekoha said that it will be out of place for an insurer with a capital base of N200 million to provide risk cover for a bank with a capital base of at least N25 billion.
He was referring to risk covers provided banks by insurance companies including the controversial fidelity guarantee, money-in-transit and property covers, insisting, "even with reinsurance treaties, it is not too good for a general risks underwriter having a capital base of N200 million to provide cover for a bank capitalised at N25 billion".
Efekoha equally feared that if the prescription is allowed to stay, NAICOM might be tempted to further hike the capitalisation of insurance companies too soon.
Reacting to the same development, Mr. Austin Isire, Managing Director of Standard Life Insurance Company Limited warned that share capital alone would not bring about the much desired efficiency in the finance sector. He advised that emphasis should be laid on how to shore up the value of the national currency.
According to him, if government should put in place policies to bring down the exchange rate of national currency to about N20 to a $1, "all the hues and cries about capital inadequacy would fissle out". He advised government to work on socio-economic factors as a way of raising the value of the Naira to a desired level and Nigerians standard of living.
On the impact of this development on insurance, Isire argued that since banks and insurance companies are inter-connected, reduction in the number of banks might weigh down productivity of the insurance industry.
Again, the successful recapitalisation of banks at that level would encourage NAICOM to increase capitalisation of insurance companies out of proportion.
How this development plays out would be determined by policy guidelines of NAICOM in the days ahead but one thing is sure, capitalisation of insurance companies will definitely go up.
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