•Says banking sector recapitalisation will have positive implications for Nigerian economy
Chigozie Amadi
A report by the African Export and Import Bank (Afreximbank) that was issued by the Managing Director and Group Chief Economist, Afreximbank, Dr. Yemi Kale, has stated that the recent reforms initiated by the Central Bank of Nigeria (CBN) are yielding positive results.
The “Nigeria’s central bank’s reforms,” according to the report, “are yielding results” and have enabled the Naira to make some “gains in official and parallel (foreign exchange) markets” by appreciating from its record low performance of N1,915/$ in February 2024 to N1,330/$ and N1,100/$ in March and April respectively as at the time of writing the report.
These reforms included measured taken in the foreign exchange management to improve the value of the Naira and recapitalisation of the Nigerian banks and high monetary policy rate (MPR) among others.
The report, which was dated Afreximbank Research May 2024 and titled “Monthly Developments in the African Macroeconomic Environment,” said that “despite the unpopularity of the bank recapitalisation policy within the banking community, it has positive implications for the Nigerian economy.
“Additionally, it is anticipated that the policy will simultaneously help mop up excess money supply and curb inflation, apart from expanding the capacity of banks to supportthe government’s drive for a trillion[1]dollar economy.
“The policy is expected to improve the resilience of Nigerian banks and reduce their vulnerability to financial shocks in the face of evolving global and local headwinds.”
The report noted that the CBN raised the minimum capital requirement of commercial banks with international license authorisation to N500 billion and made similar upward revisions to the requirement for other bank categories, including national N200 billion, regional N50 billion, merchant bank N50 billion, non-interest banks N20 billion and regional non-interest bank N10 billion.
It said: “The recapitalisation process, intended to make Nigerian banks more resilient and increase their capacity to support the government’s $1 trillion economy drive, is to be completed in two years.
“The CBN further excluded shareholders’ funds from the requirement and limited the options of banks to meeting the new requirement by either raising fresh capital, exploring mergers and acquisitions, or upgrading/downgrading their licenses.
“By this additional clause, nearly all Nigerian banks must mobilise capital aggressively to cover their shortfalls.
“With the average bank in Nigeria falling far short of the regulatory requirement, the banking system could be bracing for another round of merger and acquisition, as seen in the previous 2004/2005 recapitalisation process that reduced Nigerian banks significantly from 89 to 24.”
The report further noted that the hike in interest rate by the CBN would have different impacts on the economy, influencing various sectors of the economy through “higher borrowing costs, as lending rates rise in line with the MPR.
“The elevated MPR will also likely contribute to an uptick in the loan default rate.
“With higher interest rates, servicing debt will become more expensive for borrowers, leading to financial strain and a rise in defaults across various sectors.”
However, “the allure of earning higher interest rates on savings prompts individuals and organisations to allocate more of their income towards savings, reducing money supply and inflationary pressures,” the report added.
WHAT NEXT?
The report stated that the “MPC is likely to maintain its hawkish stance during its upcoming meeting in May” while “greater Naira stability will attract increased inflow of foreign portfolio investments.”
It also projected that “diesel prices (may) settle below the N1,000/litre psychological threshold.
