Nigerian Banks Must Recapitalise to Revive Economy—IMF

By Modupe Gbadeyanka

The need for deposit money banks (DMBs) operating in Nigeria to raise fresh funds to boost their capital adequacy ratios (CARs) otherwise known as capital base, has been emphasised by the International Monetary Fund (IMF).

Speaking at a function in Lagos over the weekend, IMF’s Mission Chief for Nigeria, African Department, Mr Amine Mati, explained that the recapitalisation was needed to ensure the aim of the Economic Recovery and Growth Plan (ERGP) formulated by the present administration of President Muhammadu Buhari was met.

The ERGP, a Medium Term Plan for 2017 to 2020, was designed by the Federal Government and launched some months ago to jumpstart the economy.

The last recapitalisation in banking sector in Nigeria happened in 2005 and the Central Bank of Nigeria (CBN) then raised the minimum capital base from N2 billion to N25 billion, leaving some banks to merge and other undercapitalised banks acquired by bigger lenders.

After the exercise, the number of banks in Nigeria reduced to 25 from 89.

At the moment, there are 21 commercial banks, four merchant banks and one non-interest bank.

In Nigeria, the central bank pegged the capital adequacy ratio for banks at 15 percent, though most banks

The Central Bank of Nigeria (CBN) has continued to advise banks to double provisions on performing loans to two percent to build adequate buffers against unexpected losses, as liquidity ratios fall. Besides, lower revenues for government and oil companies due to plunging crude prices have led to unsecured exposures for banks that are likely to increase credit risk and loan losses. The level of non-performing loans has risen to nearly 15 per cent against five per cent regulatory threshold and lenders need new capital to maintain sound capital adequacy ratio.

Speaking at the 2017 Chartered Institute of Bankers of Nigeria (CIBN) Investiture, Mr Mati said lenders in the country should seek fresh capital from the Eurobond market.

This, Business Post reports, some banks are already doing.

In May 2017, Zenith Bank Plc expressed its intention to issue about $500 million Eurobond in the second tranche of the $1 billion Global Medium Term Note programme it launched in 2014.

In the first tranche of the exercise, the financial institution’s $500 million Eurobond was oversubscribed by investors mainly from Nigeria, the United States, the United Kingdom and the European Union.

Zenith Bank then explained that it, “Intends to utilize the net proceeds of the Second Tranche Notes for its general banking purposes.”

“The net proceeds from the issue of the Second Tranche Notes will be paid into the Bank’s foreign currency domiciliary account and may be converted into Naira or retained in foreign currency,” it said further.

In June 2017, the $500 million Eurobond launched by United Bank for Africa (UBA) Plc in May 2017 was oversubscribed by investors from the United Kingdom, Europe, Asia, the Middle East and the United States, Business Post can report.

It was gathered that exercise was 240 percent oversubscribed, reflecting the strong demand for UBA’s credit and support for its pan-African financial services strategy by global investors.

This month, Fitch Ratings described the issuance of Eurobonds by Nigerian banks as a step towards reducing maturity mismatches between foreign-currency (FC) assets and liabilities.

The global rating firm said the return of Nigerian banks to the international bond markets lessens FC liquidity risk, but the impact will be modest as the new bond issuances are small relative to total term FC lending.