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The N25 billion bank capital base
CHILO C. OFFIAH
I could not hide my
excitement when I read about the recent increase in banks’ capital base from N2
billion to N25 billion. I have also taken interest in reading the various
articles and pronouncements for and against the new policy. I still come to the
conclusion that the policy, if well implemented is a bold move for the banking
sector and the economy in general.
It will solve problems like stabilisation
of the naira, lowering the interest rate on credit, controlling the inflation
and providing financing for the real sector of the economy. Unless the policy is
adequately pursued, it may bring instability in the system, it will create panic
in the banking industry as it is already happening and it might at the end have
a stagnating effect on the economy as there may be no loanable funds while banks
are struggling to meet the policy. There may not even be enough liquidity in the
system or willing investors to enable banks achieve the objective. Some of the
quoted banks in the capital market are going to suffer as they will be dumped in
preference to those whose capital base are already N25 billion or nearing N25
billion.
Again, the statement from the capital
market operators, that the Stock Exchange will help quoted banks achieve the
objective is not helpful; what happens to the numerous unquoted banks? Should
they panic and close down?
I would commend the efforts of the Central
Bank team and especially the governor of the Central Bank, the minister for
Finance and all those who articulated the policy. I am, at the same time asking
that the implementation be modified in such a way that the economy is not devoid
of small banks, medium-size banks and cottage banks like you find in every other
country.
We cannot all be big. If we want to be
big, it should not be through fiat or overnight. There must be incentive for
becoming big. I am aware that the recent vogue in banking all over the world is
becoming big; HSBC Bank recently took over NAT-WEST, Lloyds Bank London merged
with TSB to become Lloyds TSB and recently, Banks of America took over FLEET,
etc, etc. Barclays and Standard Chartered Bank are still in existence and some
other smaller banks littered everywhere.
I agree that large size is the best and
the vogue; the bigger, the better. We must move towards that direction, but we
must avoid creating problem for the system. The banks should be encouraged to be
big through merger or outright acquisition of assets of the other or through the
capital market public sale of shares. We should not use force, but create
incentives attractive enough for some banks to undergo/pursue the option.
More importantly Central Bank can tinker
on policies like allowing only banks with capital base of N30 billion and above,
operate as clearing banks. In other words, a bank automatically becomes clearing
bank when its capital base hits N30 billion and above. This is in addition to
other benefits.
Banks with capital base of N20 billion and
above, enjoys Federal Government deposit both in local and foreign currency. The
bank therefore aspires to achieve a capital base of N20 billion which
automatically qualifies the bank for Federal Government and parastatal’s
deposit. Any bank with capital base of less than N20 billion should not have
government fund. The deposit is made relatively cheap to force lending rate down
to single digit and lessen the rate of inflation.
Banks with capital base of N10 billion and
above, should only be allowed to operate the Central Bank’s foreign exchange
market. Nobody will then be forced to tell banks of the enormous advantage of
achieving the above target. We have recently read from FSB International Bank
that the reason for its loss of N2.6 billion was because of its suspension by
the Central Bank from the foreign exchange market. That explanation raises an
eyebrow to say the least.
The banks with capital base of N2 billion
should be allowed to exist and to do their normal banking business to prevent
the system creating unnecessary panic. It should be left for the banks to decide
whether to retain their capital base at N2 billion or to gradually move up to
N10 billion, N20 or N30 billion in future and enjoy the stipulated benefits.
They might also decide to remain small and operate as small, medium, cottage or
regional banks as all the banks cannot be big. What Central Bank should do is,
determine the minimum capital base of any bank, which has been decided as N2
billion and the banks that choose to operate with N2 billion capital base should
be left to do so.
I agree we need big capacity to fund
economic activities in the country, but we cannot all be big. All the investible
cash in the system cannot be enough to shore-up all the banks to N25 billion
capital base should they decide to do it alone without merging and acquisition.
It is interesting to note the comparison
with Malaysian banks in term of capital base, but we have forgotten that the
Malaysia Government did not brutally devalue their currency in the past 20 years
as Nigeria did. Our Naira has been unstable and continuously devalued from US$1
equivalent to Nigerian 77k in 1979 to US$1 now equivalent to N140, why would not
the banking base be eroded? Unless we check the downslide of the Naira and
improve the convertibility, we will continue to increase the bank capital base.
So, the solution is to strengthen and
protect the Naira, stop the unending downward slide and stop the leakages in the
system, the banks’ capital base will improve on its own.
•Chief (Dr.) Chilo C. Offiah, Lagos
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