Recapitalization strategy of CBN will cause problems for Nigerian Businesses

As welcome as the Central Bank of Nigeria (CBN’s) plan to recapitalise local banks to be in tune with current realities amid increases in exchange and inflation rates, such a move may not really improve lending to the real sector to bolster enhanced economic activities as being anticipated, operators have said.

This is because banks shy away from the “many risks” associated with lending to businesses and prefer to invest in government’s short term and long term borrowing through Treasury Bills and Bonds, for higher yields, thereby denying entrepreneurs the requisite funding to retool and expand operations that will boost growth in the nation’s gross domestic product (GDP).

The CBN Governor, Monday, announced that part of his plans for his second-term, five-year tenure would be to shore up banks’ capital base to make them more globally competitive, as well as enhance lending to businesses, particularly the small and medium enterprises (SMEs) to enhance government’s economic diversification agenda.
However, real sector operators and other market watchers believe nothing much might change even with higher capital base, given banks attitude towards businesses.

Specifically, the Director-General, Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, told The Guardian: “There may not be any significant impact on real sector lending. The biggest issue with the real sector lending is the high credit risk to the sector, and the CBN plan did not address this. The SMEs segment also worries about high interest rate and absence of long term funds, so Capitalisation review will not fix these problems.”

Agreeing, a former President, Manufacturers Association of Nigeria (MAN), Frank Jacobs, noted that although higher capital will imply more liquidity available for lending, “but the attitude of the bankers have not changed, and that won’t change where they don’t really support the real sector of the economy. So, I don’t think anything would really change.”

Besides, Jacobs, a vintner and Managing Director/Chief Executive, Jacobs Wines, noted that increasing banks’ capital is not the real issue, but actually mopping up the capital from investors/shareholders.

“The problem in the banks might not be capital because increasing the capital base will require more injection of funds into the banks, and that might be difficult because people don’t have the disposable income for it,” he said.
Notwithstanding that the CBN has not prescribed and amount or when the exercise might take place, but analysts have called for caution, even as the Chartered Institute of Bankers of Nigeria (CIBN), President, Dr Uche Olowu, noted that
“adequate capital requirement is relative and depends on the level of activities the bank is involved in.”

Yusuf, while lauding the move, saying: “It would strengthen the capacity of banks to support the economy better, especially with regards to large projects and bolster their capacity to withstand macroeconomic shocks,” cautioned that “the recapitalisation programme should be undertaken in the manner that would not inflict damaging disruptions to the banking system. The process must be properly thought through to ensure minimum shocks on the financial system. Care should be taken not to trigger a confidence crisis in the banking system.”

Similarly, a development economist and former banker, Tope Fusua, argued that increasing the minimum capital base means increasing banks’ risks, which at the end of the day could be counter- productive. Rather, he urged the CBN to be more efficient in its regulatory role by making banks play their role of intermediation in the society as in other climes.

He said: “I read between the lines, and I believe the CBN wants banks to sit up just in case it calls for more capital. Personally, I don’t think we should be embarking on another consolidation process, because we can see that capital inadequacy is not the problem we have in our banks. The more the capital we ask our banks to put up the higher the risks they seem to be taking.”

He further recalled, “After Soludo’s 2005 consolidation, we had to put up over N600 billion to bail out a few banks that were deemed too big to fail. Then we created AMCON in 2010/11, to again bail the banks out with about N6trillion of sticky loans, which are still sticky at AMCON. Now, some economic advisers are calling for AMCON 2 already, since they have seen how easy it is to bail out banks with taxpayers’ money; it’s unfortunate.