February 11, (THEWILL) – The issue of minimum capital base for deposit money Banks has, once again, come to the front burner, following the indication by the Governor of the Central Bank of Nigeria (CBN) earlier this year that there was a need to raise the minimum capital base of deposit money banks to put them in a position to support the one trillion-dollar economy that the current administration is targeting.
Although Nigerian banks have been doing relatively well and some people think there is no need for a new minimum capital base for the industry, the reality is that compared to the size of our economy, the Nigerian banking industry is grossly under-capitalised and lacks the capacity needed to adequately fund the growth of the economy.
It is a contradiction that though Nigeria has the biggest economy on the African continent, no Nigerian bank is amongst the top 10 most capitalised banks in Africa. Although the list of biggest banks in Africa is dominated by South African banks, banks from countries with much smaller economies like Morocco, Algeria, and Egypt also make the list of the top 10 most capitalised banks in Africa.
The other irony is that one single bank in South Africa, (Standard Bank Group) has more tier-one capital at $13.2 billion than all the top 10 banks in Nigeria which have a combined tier-one capital of less than $12 billion.
When we take into context that Nigeria has a much bigger economy than these other African countries and a population that dwarfs most of them, we begin to realise that our banks need to be more adequately capitalised to fund the economic growth that we so much desire.
Before we go on to discuss what should be the ideal minimum capital base for deposit money banks in the country, I would like to refer to that last capital raising exercise carried out by the Olusegun Obasanjo Administration which even though was deemed to be successful, failed to achieve the ultimate objective empowering banks to fund the productive sector of the economy.
It is true that the 2005/2006 bank capital raising exercise was very successful with the industry tier one capital increasing by over 200 per cent within a space of two years.
However, the increased capital in the industry failed to translate to increased funding for the productive sector as the government’s appetite for funding also increased significantly with a resultant effect of the government crowding out the productive sector from the money market.
This was despite the fact that the newly reformed pension industry was also accumulating trillions of Naira in pension funds which greatly increased liquidity in the financial services industry.
Despite this, up to 70 per cent of the funds available in the industry went to the government in form of Bonds and Treasury bills, while most of what was left of the 30 per cent went towards financing the big corporates and multinationals, This left very little to support Small and Medium-scale Enterprises (SMEs) that are the engine of growth in the economy.
For the proposed bank capital raising exercise to achieve its aim of supporting the growth of a one trillion-dollar economy, the increased capital of the banks must be directed towards enhancing the capacity of the banking industry to fund SMEs to stimulate growth in the economy.
The practice of the government cornering most of the available funds in the financial industry to finance unproductive activities must stop. Instead, the government must be more focused on supporting the growth of our SMEs, which will not only ensure job creation and economic growth but also ensure increased government revenue through taxes.
As of today, less than 3 per cent of Nigerians have access to loans from the formal sector, and in a thriving economy, this figure should be at least 70 per cent. However, our bankers have failed to develop the credit system in the country as it is much easier for them to earn fat interests and fees from government securities. This is opposed to the hard work of managing millions of small lenders with the higher attendant risk associated with lending to them.
Given Nigeria’s status as the biggest and most populated economy in Africa, it is not out of place to expect that Nigerian banks should be among the biggest on the continent. Also, benchmarking what our African peers are doing, will help us to arrive at what should be the minimum capital base for banks in the country.
With $13.2 billion in tier-one capital, the Standard Bank group of South Africa is the most capitalised bank in Africa. This is followed by the National Bank of Egypt with $7.3 billion, Compatriot Banque Misr, also of Egypt, with $7.2 billion, Ned Bank of South Africa with $5.9 billion.
First Rand of South Africa has $5.5 billion, Attijariwafa Bank of Morocco $5.4 billion, ABSA of South Africa boasts $5.3 and Banque Centrale Populaire of Morocco $4.9.
In contrast, Zenith Bank, which is the most capitalised bank in Nigeria, in terms of tier-one capital, has a capital base of $2.6 billion, while it ranks as the 12th most capitalised bank on the continent
It is clear from the above summary that if banks in much smaller economies than Nigeria have tier-one capital running into several billions of dollars, Nigeria, with a much larger economy and massive population, will certainly need more for us to remain competitive with our African counterparts. It is on this basis that I believe that the minimum capital base for tier-one banks in Nigeria that are licensed to operate internationally should be at least $5 billion.
Similarly, the minimum capital base for banks licensed to operate nationally should be at least a billion dollars. The minimum capital base for regional and other categories of banks should also be reviewed accordingly.
As I once mentioned elsewhere, rather than wield the big stick on banks that are unable to meet the new capital requirements, banks should be incentivised to meet up with the new capital requirements and those that are unable to meet up allowed to play in smaller niche markets that their capital base can accommodate.
With the new capital base in place, the focus of our fiscal and monetary policy should be such that lending would be encouraged to the private sector to boost both production and consumer demand.
This effectively means that the government should drastically reduce its borrowing from the money market so that there are more funds available for the private sector in terms of fiscal policy, while efforts are put in place to bring down interest rates in terms of monetary policy.
With the new system in place, the average Nigerian entrepreneur, even consumer, should be able to access bank credit. This will increase economic activities both on the demand and supply side, thus accelerating economic growth while banks significantly increase their asset size.
We will effectively be developing a credit culture in our society where the average citizen will easily be able to access credit and be expected to pay it back when due.
The downside of this credit system that bankers are apprehensive about is that some Nigerians may take advantage of the system and deliberately default on loans extended to them.
That is where the credit rating agencies come in as defaulters would be blacklisted from all sorts of credit in the country until they liquidate their outstanding obligations. As time goes on, Nigerians will begin to realise the benefit of good credit ratings when they see their contemporaries accessing higher facilities for maintaining a good credit score, while those with poor credit scores are denied access to credit.
With the development of the credit culture in our economy, we will be able to unlock a lot of our economic potential which will in itself trigger rapid economic growth for the benefit of all Nigerians.
***Kunle Oshobi is a Development Economist and Management Consultant.*