Capital Base: Bankers Seek Reduction to N20bn
Canvass stratification, deadline extension
By Ayodele Aminu in Lagos and Kola Ologbondiyan in Abuja
Representatives of banks will today in Abuja present the industry's position on the N25 billion minimum capital base policy recently enunciated by the Central Bank of Nigeria (CBN) to the senate. The bankers are seeking reduction of the capital base to N20 billion for megabanks.
Also to be canvassed is the stratification of banks into three categories with each having different amount as capital base.
The 19-page position paper to be submitted to the Senate Committee on Banking, Insurance and Financial Institutions by the bankers would also seek an extension of the recapitalisation deadline from December 2005 to December 2006.
Governor of the CBN, Professor Charles Soludo, had in a meeting with the Bankers' Committee in Abuja last month directed banks to raise their capital base from N2 billion to N25 billion by December 2005. It is believed the policy was a subtle way of compelling banks to merge.
Disturbed by this development, bank executives at a meeting in Lagos three 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, House of Representatives and the CBN.
In canvassing the need to stratify banks into investment, universal and mega banks categories with each having a capital base of N5 billion, N12.5 billion and N20 billion respectively, the 10-member panel which prepared the bankers report entitled "Recapitalisation of Bank to N25 billion: Banking Industry's Position Paper," noted that currently, the estimated average shareholders' funds for the top 10 banks in the economy is N12.9 billion while the industry average is N3.27 billion.
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 N20 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 be 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."
Noting that a good number of banks have not even met the current minimum capital requirement of N2 billion, the bank chiefs stated that these 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 Africa a mere theoretical postulation."
Juxtaposing the development indices in Nigeria vis-a vis other economies of the South East Asia and South Africa, the panel emphasised 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 capitalised banks. The high GDP values of the emerging economies derive from the 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 $4,528.14, the Nigerian economy with a population of 125.8 million has a GDP of only $3.04 billion and per capita of GDP of 24.2.
"South Africa, with population of 46.4 million has a GDP of $107.7 billion, per capita GDP of $2321.1 and GDP growth rate of 5.0 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 economies into perspective, the bank chiefs stated 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 economy vis-a-vis the Nigerian economy, the minimum capital requirement of 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 same 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.
Meanwhile, the Senate Committee on Banking, will this morning meet with the members of the Bankers' Committee as well as the representatives of the banking unions.
The meeting, which has been scheduled for the Senate Hearing Room 1, would be attended by the 10-member Bankers' Committee, the representatives of the National Union of Banks Insurance and Financial Institutions (NUBIFIE) and the Association of Senior Staff of Banks, Insurance and Financial Institutions (ASSBIFI).
THISDAY gathered that "the Senate Committee found it necessary to also invite the stakeholders for dialogue and consultations in order to take an informed decision that would subsequently be tabled before the Senate as a whole."
There were indications yesterday that today's meeting, expected to commence by 11am would be open to the public to avert "the misrepresentations that trailed last week's meeting with Soludo".
In an interactive session with media executives in Lagos three weeks ago, Soludo had declared that there was no going back on the N25 billion capital base for banks. He had also declared that the CBN would not extend the December 2005 recapitalisation deadline.
He 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."
Soludo also said a N25 billion capital base requirement for banks in an economy like that of Nigeria worth $65 billion is not too small and that the figure is just "the minimum as we expect some banks to have more than that after mergers and acquisitions".
He said it was just unacceptable that Nigerian banks cannot compete with foreign banks because they are "just too small".
According to the CBN 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.
Speaking further, the governor stated that by December 31, 2005, the apex bank would publish the names of the banks that it can vouch for and would then encourage depositors to patronise them.
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.
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