Many commercial banks need to raise new capital and boost their capital adequacy ratios for them to drive the desired growth in the economy, the International Monetary Fund (IMF) said at the weekend.
The IMF’s Mission Chief for Nigeria, African Department, Amine Mati, said the commercial lenders needed recapitalisation to secure fresh funds to boost the Federal Government’s chances of achieving the Economic Recovery and Growth Plan (ERGP) target. The ERGP, a Medium Term Plan for 2017 to 2020, is designed to help the Federal Government jumpstart the economy.
Mati spoke at the 2017 Chartered Institute of Bankers of Nigeria (CIBN) Investiture with the theme: Coherent set of policies for greater exchange rate flexibility.
He advised the Federal Government to embark on full Value Added Tax (VAT) reform and cancel tax holidays and exemptions that erode the Company Income Tax (CIT) base. He also urged the government to increase taxes on alcohol and tobacco and broaden VAT by revisiting exemptions.
The last mass recapitalisation in banking occurred in 2005 when the minimum capital base was raised from N2 billion to N25 billion. That exercise reduced the number of banks from 89 to 25 after mergers and acquisitions. Now, there are 21 commercial banks, four merchant banks and one non-interest bank.
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.
While the capital adequacy ratio of most banks is generally above the minimum regulatory threshold of 15 per cent, the adoption of Basel II implies additional capital as banks grow their risk assets.
Besides, banks that are designated as systemically important banks (SIBs) are expected to provide for additional 100 basis points to increase their minimum capital adequacy ratio to 16 per cent as against the general requirement of 15 per cent. National and regional banks need only 10 per cent capital adequacy ratio.
Many banks are already accessing the Eurobond market for tier-2 capital. Market sources said more lenders may return to the capital market for additional funds in the months ahead to create a headroom for loan growth.
On exchange rate policy, Mati described the Investors’ & Exporter’s Forex Window as a good move to address market segmentation, adding that the CBN should unify/ simplify the forex market. He said the current exchange rate was in line with market expectations, but there are significant headwinds, amidst structural challenges and elevated risks.
CBN Deputy Governor (Financial System Stability) Joseph Nnanna, who was elected Fellow of the CIBN, said the exchange rate was converging and moving southward.
He said although the IMF wants the CBN to unify the rates, that can happen organically or inorganically. “For us at the CBN, we believe that organic convergence is the way to go. Inorganic convergence, which is forced, will always produce an arbitrage and that we don’t want,” he said.
In Nnanna’s view, the exchange rate has greatly stabilised. “Before, the naira exchange rate to a dollar was for almost N500/ dollar. Today, it has come down through a combination of policies. We didn’t force it down. It came down organically or naturally, and that’s the way it is supposed to be,” he said.
He said the exchange rate will not rise as the end of year approaches.
“No, the rate will not go up, take it from me. We have achieved stability and the stability is here to stay. The sustainability of the dollar interventions is already evident, the foreign reserve is growing. As I speak, it is $34 billion. When we had volatility, the reserve was as low as $20 billion. But let me say one thing: Nigeria can make do with a reserve level of $20 billion,” Nnanna said.
“All we need to manage the economy and manage it properly is a reserve that can cover at least three months of import.”
On the I & E Forex Window, the CBN Deputy Governor said it had remained a huge success as it performed beyond the CBN’s expectation. “Within four months, the I & E Forex window was introduced, we have seen volume of over $10 billion and above – it’s a huge success. I believe other countries can copy a page from us,” Nnanna said.
