…In Nigeria, banks dominate the financial system and CBN has continued to manage potential threats in the banking industry
By Arize Nwobu
SAT JUNE 29 2024-theGBJournal| The banks’ recapitalization policy scheduled for March 2026, by the Central Bank of Nigeria (CBN), is a proactive and commendable policy which aim at enhancing the solidity of banks in driving the economy for greater impact in a globalized world with fast systemic interactions.
Research has shown that banking crisis occur on average once every 20 to 25 years and that annual probability of a crisis is 4-5 per cent and that higher capital base and liquidity requirements reduces rate of bank failure.
As per CBN policy, banks will recapitalize according to their respective categories. International banks will have a minimum share capital of N500 billion, National banks, N200 billion, Regional and Merchant banks, N50 billion. Recapitalization will further enhance the banking landscape in particular and the financial system in general.
The financial system which is broadly segmented into the money market and capital market plays a central role in driving the economy. It mobilizes funds from surplus ends to deficit ends for production, entrepreneurship, innovation, job creation and wealth creation.
A robust financial system has three basic features, namely, flexibility, resilience and internal stability, and engenders a stable macro-economy which enables businesses to plan conveniently and also attracts foreign capital into the economy.
Worldwide, central banks ensure financial system stability and they became more proactive after the 2008-2009 global financial meltdown which triggered a domino effect across financial markets and economies. Central banks enhanced the financial architecture of their respective economies to cushion the effects of any systemic crisis.
Harvard Economist, Dani Rodrik had noted that the expansion of globalization and movement of free capital flow were the reasons why economic crisis have become more frequent in both developing and advanced economies alike.
Some of the causative factors of financial system crisis include, global imbalances, non-performing loans, under-regulation, liquidity mismatch, exchange rate regimes, market liberalization and poor macro-economic policies. Others include complex risks, equity markets, fall in asset prices, contagion, information asymmetries etc.
CBN prioritizes financial system stability and has continued to evolve necessary policies in that regard. Prior to 2004, Nigeria’s financial system was characterized by inadequate capital base, growing resort to CBN bail out and systemic crisis. Former CBN Governor launched a reform agenda which restructured, refocused and strengthened the banking industry and financial system.
The reform reduced corporate rascality in the banking industry as banks and other stakeholders became more compliant to regulatory requirements. It resulted in a sound and stable banking system, banks increased their capital base from $15 million to $200 million through injection of fresh capital, and mergers and acquisitions.
Other elements of the reform include the adoption of risk-focused and rule-based regulatory framework, adoption of zero tolerance in data returns by Deposit Money Banks, adoption of new code of corporate governance, among others.
The FSS 2020 was a proactive document which the implementation helped to cushion the effects the global financial crisis would have exerted in the banking system.
In developing countries, the bank is the most important financial intermediary which provides the major share of financial services.
In Nigeria, banks dominate the financial system and CBN has continued to manage potential threats in the banking industry.
In 2018, the apex bank had introduced the residual dividend policy which states that: ‘’no bank shall pay dividend on shares until all its preliminary expenses, organizational expenses, share selling commission, brokerage, amount of losses incurred and other capitalized expenses not represented by tangible assets have been completely written off and adequate provisions have been made to the satisfaction of the bank for actual and contingency losses on the risk assets, liabilities, off balance sheet and such unearned income as are deductible therefrom.’’
The policy is targeted at banks with high Non-performing loans (NPLs) and low Capital Adequacy Ratio (CAR) and aims at facilitating sufficient and adequate capital build up for banks in line with their risk apetite.
CBN is not relenting, the forthcoming banks’ recapitalization will further strengthen the banking system in particular and the financial system in general and help to boost the economy, going forward.
Nwobu, a Chartered Stockbroker and Business Journalist wrote via| arizenwobu@yahoo.com| Tel: 08033021230
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