The recent devaluation of the Nigerian naira against the United States dollar has sparked discussions regarding the urgent need to raise the capital base of commercial banks in the country. Analysts argue that the 2004 banking industry recapitalization, which increased banks’ capital base from N2 billion to the current N25 billion, has been weakened.
When considering the 2004 exchange rate of N25 billion, which was approximately N100, the capital base of banks in dollar terms averaged $250 million. However, at the current exchange rate of N750, the equivalent of N25 billion is substantially lower, at just $33.3 million.
Capital adequacy ratio, an important measure in banking, assesses a bank’s capital in relation to its risk-weighted credit exposures. The last monetary policy committee of the Central Bank of Nigeria (CBN) reported that as of April 2023, the banking system’s Capital Adequacy Ratio (CAR) stood at 12.8%, Non-Performing Loans (NPLs) ratio at 4.4%, and Liquidity Ratio (LR) at 45.3%.
Efforts to obtain a response from the CBN regarding potential recapitalization and concerns about the banks’ capital base after significant naira depreciation were unsuccessful due to the spokesperson, Dr Abdulmumin Isa, being in a meeting.
Experts argue that recapitalization is necessary to address the challenges arising from the devaluation. Musa Wapahyal Balla, a Compliance Officer in a Tier 2 bank, suggests that Nigerian banks and firms may experience a decline in valuation due to the perception of weakened strength. He predicts that banks may require a recapitalization of around N100 billion, which could lead to mergers and acquisitions, potentially resulting in job losses.
Abiola Rasaq, a former economist and head of Investor Relations at UBA Plc, highlights the need for strong capital buffers to ensure the sustainability of the banking sector. He suggests that recapitalization may be on the agenda of the new CBN governor to support economic growth and audacious reforms.
Ayokunle Olubunmi, the head of banking at Augusto & Co, emphasizes that banks have been preparing for the devaluation and engaging in capital raising exercises. Some banks have already completed their capital raise, while others are planning to do so before the end of the year. Olubunmi mentions the issuance of special bonds known as AT1 bonds as part of capital-raising measures.
However, Professor Uche Uwaleke, an economist and capital market expert, cautions against regulatory-induced recapitalization compelled by the CBN. He suggests encouraging banks to recapitalize through mergers, acquisitions, or raising capital in the stock market. Uwaleke argues that a stronger capital base in dollar terms will attract foreign capital and improve banks’ competitiveness globally.
The discussion surrounding recapitalization is not new, as the now-suspended CBN governor, Godwin Emefiele, previously disclosed plans for a recapitalization program in order to position Nigerian banks among the top 500 globally.
The potential recapitalization of Nigerian banks comes as a response to the devaluation of the naira and aims to strengthen the banking sector, enhance stability, attract foreign capital, and support economic growth. The approach to recapitalization and the decision on its implementation will be influenced by the incoming CBN governor.
