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B N W: Biafra Nigeria World News |
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Bank Capital Base And The Central Bank
Quite expectedly the recent proposal by the Central Bank of Nigeria (CBN) to increase individual Nigerian banks' minimum capital adequacy from N2 billion to N25 billion has attracted diverse responses from interest groups and individuals from within and outside the country. Most of the more vocal of such responses, I dare say, are not just ill-informed but have also tended to reflect a politicisation of the issue at stake through their insistence on the maintenance of the status quo. A few, however, have been constructive in emphasising the potential collateral effect of the proposal, particularly with respect to the possibility of exacerbating the already worrisome unemployment situation in the economy.
In the light of the foregoing, it becomes pertinent to dispassionately inform the general public and all those genuinely interested in moving the Nigerian economy and people forward about what the proposal can achieve, while suggesting ways of mitigating some of the side effects whose rather justifiable anticipation seems to cast a slur on the proposal. A minimum capital requirement for a bank is the least proportion of the bank's assets that must be set apart by the owners (shareholders) of the bank. It is meant to increase the safeguard of depositors' savings as well as the stability of the country's financial system. Unlike the other sectors of any economy, the banking industry is particularly vulnerable to macroeconomic shocks such as inflation and recession, both of which affect interest rates.
Banks are also very vulnerable to interest rates change because both sides of their balance sheet are largely comprised of financial assets. A bank uses people's deposits (its liability) to create loans (its assets), and if for any reason its assets shrink in value as a result of either bad loans or changes in interest rate that affect asset-side securities more than liability-side securities, its owners' capital contribution must be sufficient to make up for that shortfall.
Otherwise, the bank would be perceived as incapable of returning depositors' savings on demand, which in turn would lead to depositors becoming desperate to withdraw their savings before a serious liquidity crisis might affect the bank. Such rush withdrawals and their domino effect would not only destroy the distressed bank; they would also affect otherwise healthy banks in ways that compromise confidence in the financial system. In all, this would lead to the unavailability of credits for production and hence worsen unemployment.
Besides this basic objective of a minimum capital requirement, there is a requirement that a bank sets apart a significant sum of its own capital to support its profit-making activity (credit provision) so as to ensure that such activity is governed by order and prudence. This in turn reinforces the basic objective of the capital adequacy requirement and forces the bank to be a true financial intermediary if it is to remain a viable on-going business without being propped up by corruptly - and inefficiently - sourced government funds. For instance, let us assume that Carrefour, a French multinational supermarket business chain, has concluded plans with a rich Nigerian investor abroad to locate some Carrefour shopping malls in some major Nigerian cities, as a result which both parties seek a N20 billion ($154 million) loan from some Nigerian bank(s).
A bank with 50 per cent liabilities to assets ratio (under a minimum capital requirement of N10 billion) cannot be a group member of banks that could seek to provide this N20 billion loan, let alone provide the entire amount by itself. On the other hand, a bank with a N25 billion minimum capital requirement and 50 per cent liabilities to assets ratio can either provide such a lucrative loan by itself or participate comfortably in a syndicated arrangement to provide it.
Note that the majority of profit-seeking banks the world over typically have liabilities to assets ratio of around 90 per cent, which means that a high Naira value of minimum capital requirement would motivate a viable bank to scour the land for substantial deposits (savings) that would guarantee its capital contributors (owners) respectable returns on their investment. Under a N25 billion minimum capital requirement, a 90 per cent liability ratio would require a bank to source N225 billion from depositors and creditors. With such a substantial amount, the bank would be able to participate in selling usually lucrative large denomination project loans of the kind described above as well as comfortably provide several smaller denomination loans to small and medium size firms. Both loans would tremendously reduce unemployment as many of the country's idle production inputs (particularly labour) are put to work.
Indeed, the merits of the proposed increase in banks' capital adequacy should not be obscured by vested interest and ill-informed, politics-laden commentaries. Let's face the basic fact that the bank private debt market dominates Nigeria's financial market, like most developing countries' financial markets. Unfortunately, this dominated players in the Nigerian market has done a woeful job at financial intermediation, which ought to be its primary function, and have in turn contributed little or nothing to the country's economic growth - a veritable contrast with what obtains in countries like South Korea, Malaysia, Thailand, Mexico, Brazil, South Africa, and Indonesia.
These pertinent questions ought to be asked: Of the money supply in circulation in Nigeria what percentage is bank deposit based? Of the total amount of loans held by economic agents in Nigeria, including government units, what percentage is provided by banks? You will be scandalised to learn of answers to these questions in relation to what obtains in the other exemplary countries mentioned above. Are well-meaning Nigerians (the leaders and the led) listening? I am not addressing the narrow-minded, shameless, and self-centred "come-choppers" whose notoriety is well-known even beyond the country's shores.
Fact: international investors loaded with investable funds, even your rich sons and daughters in foreign countries, do not put their wealth in a market that has no viable financial market to support a sustainable foreign production or to support after-sales cash flow management of foreign investments. Fact: funds invested internationally are usually large and the working capital funding that supports such foreign capital inflow are equally sizeable. Can a bank with typically less than $500 million handle such required working capital funding support?
If no, which prudent, profit-seeking foreign investor would venture into such a market? Fact: it is only in a financial system where the dominant players perform the true intermediation function that small, medium and large sized firms that identify attractive production opportunities but lack sufficient funds find funds to avail themselves of such production opportunities and thereby create jobs. Currently, this role is minimally filled by micro-market financial schemes provided by NGOs under the World Bank's auspices - a scenario that is not only unsustainable but of minimal effect in increasing production and job creation.
This brings us to the few voices that have reacted constructively to the proposal particularly out of concern for its potential negative impact as regards employment. Some have suggested a N10 billion new minimum capital adequacy (or "capital base'). To such voices, let me simply respond, in the light of the foregoing, that the equivalent of N10 billion in terms of hard currency (the US dollar or the Euro) is inadequately for the kind of global production environment in which viable banks are expected to participate. Some have suggested - in fact insisted on - a more gradual phasing-in of the N25 billion minimum "capital base". And I ask them: Why defer the inevitable? If a viable business cannot respond forthrightly to an "unexpected" change to its business environment over a few months' period, then its future viability is in doubt. Conversely, it is rather a "cake walk" for a worthy business to respond to an "anticipated change over a period of 18 months, which is like a lifetime in a competitive business environment.
My aim is not to be dismissive of these thoughtful suggestions; rather, it is to point out that there may be constructive alternatives that could address the important concerns that inhere in such suggestions while also achieving to a considerable degree the laudable goals of the proposed capital adequacy adjustment. For instance, a city and/or state-wide N20-25 billion minimum capital requirement per major bank with its branches in the same city or state may be induced with its corresponding exemption from the strict new minimum capital requirement until it is of a significant size, say with more than 25 per cent of it main bank's size in a four branch city or state bank. This would allow the branch banks to grow organically without engendering widespread forced mergers of culturally desperate banks, which would result in both loss of competent management talents and mass retrenchment. Meanwhile, the main banks, by complying with the new proposal, would have put themselves in a position to effectively and competitively perform the financial intermediation function, which fosters credit provision to a multitude of SMEs, MMEs and foreign investment projects, all of which increase economic growth and job creation.
This desirable outcome is precisely the objective of Central Banks, including the Central Bank of Nigeria, we hope. For a Central Bank to accomplish this task effectively it must be independent of any political influence. The extent of a Central Bank's association with political platforms ought to end with the appointment and confirmation of a qualified Central Bank Governor and his/her associates.
The reasons why a Central Bank's independence is vital are: (1) That it is the seat of monetary policy - charged with the control of interest rates levels and money supply in such ways as to ensure that there is a stable financial system and a non-inflationary economy conducive to economic growth. (2) Its implementation of macroeconomic stabilisation policy must be one capable of addressing sudden macroeconomic shocks. (3) Most importantly, its stabilisation policies must, of necessity, have a short policy-lag to counterbalance the long policy-tag of fiscal policies that are ancillary fallouts of fiscal policies personnel's usual negotiations with constituencies and political horse-trading - which often has more to do with the self-interest of politicians than the people's well-being
There is therefore a clarion call for the few good men and women in Nigeria's federal legislature to make laws that would ensure and strengthen the independence of the country's Central Bank vis-�-vis its Presidency and the federal legislature itself. By so doing they would be making ineffective the larceny of the "businessmen" and 419-politicians that seek to put the Central Bank under their thumb so as to continue to use it to perpetuate a financial market condition that enriches only them to the detriment of the entire country.
The Presidency must also resist temptations to corner the Central Bank. Rather, it should stoutly support its singularly promising finance ministry and creative economic policy team while doubling its effort in implementing fiscal and growth policies that would not only complement the Central Bank's monetary policies but also stimulate the creation of other policies that would neutralise the collateral effects of correctly headed structural financial market initiatives of the apex bank.
It is time Nigerians rallied round the creative, courageous, and patriotic Soludos, Sanusis, Okonjo-Iwealas, Dukes, Tinubus, Balarabes, Oshiomholes, Egwus, etc to move the country forward in a sustainable manner. For too long the country's bright future has been held up by discredited, selfish, self-absorbed, immoral, unimaginative and shamelessly inept leaders and their cronies. We the Nigerian people must arise and reclaim our glorious destiny by understanding the facts of your environment and supporting leaders who want to serve us creditably. We must not allow Nigeria to remain in the category of "potentially great" countries. That will be a pointer to our acquiescence in the failure of our country's leadership and to more misery for our people.
*Ojah is a Professor of Finance at Wits University in South Africa.
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