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Nigeria’s Central Bank hints at a new big bang bank shake up

By Eromo Egbejule, in Lagos
Posted on Thursday, 27 June 2019 16:21

Nigeria's Central Bank Governor Godwin Emefiele speaks during the monthly Monetary Policy Committee meeting in Abuja, Nigeria May 22, 2018. REUTERS/Afolabi Sotunde

Will recapitalisation lead to a shake-out of badly-performing banks in Nigeria?

Nigerian banks face the uphill task of banking the unbanked even more aggressively after the country’s central bank governor recently announced that the financial inclusion target previously set at 80% for 2020, has now been moved to 95% by 2024.

Godwin Emefiele hinted that the N25bn capitalisation base of banks could be increased – again – in his drive to ensure double digit growth in Africa’s largest economy.

  • In 2005, a set of banking reforms implemented by Charles Soludo as CBN governor raised the limit on capitalisation of banks from N2bn to N25bn (approximately $15m to $200m then). Soludo persisted despite strong opposition and death threats and by the end of the recapitalisation exercise, 14 insolvent banks had lost their licenses and there were a series of mergers that eventually pruned the 89 banks to 25.
  • At the time of the reforms, Emefiele was deputy managing director of Zenith Bank, one of the 25 banks that survived Soludo’s secateurs.
  • The naira at the time averaged N130 to $1, a far throw from today’s official rate of N350 to $1, effectively shrinking the capital base of the banks. “If you relate N25bn with 2004 exchange rate which was about N100 (to a dollar), N25bn was about $250m”, Emefiele said. “Today, if you relate N25bn at N360 (to a dollar) you will see that it is substantially lower than $75m.”

A mirror situation

The CBN under Emefiele has issued five new commercial banking licenses this year, in part to boost financial inclusion which is still low.

  • But it has also had to rescue banks struggling with bad loans and poor corporate governance, a situation worsened by the state of the economy.
  • In addition, the Asset Management Corporation of Nigeria (AMCON) is controlling major stakes in two banks.

The situation with the banks reflects of the general state of Africa’s biggest economy.

  • Nigeria is still smarting from the effects of a 15-month recession between 2016 and 2017 and the central bank chief has himself warned that Nigeria might be on the verge of a repeat crisis.
  • Earlier this week, his predecessor and current Emir of Kano Sanusi Lamido also gave a characteristically fiesty speech, lamenting that “the country is bankrupt and we are heading to bankruptcy.” The cruise to bankruptcy was fuelled by oil subsidies, electricity tariff subsidies and debt servicing, he added.

Emefiele has also said Nigeria’s overdependence of oil and the impact of fluctuations in oil prices have exposed the economy to vulnerability and a recapitalisation of banks would put them in a strong position to fund development projects.

  • But it would also serve to weed out any other bad apples, several have fallen in recent years, from Skye Bank to Diamond Bank

Why this matters: The true strength of Nigeria’s banking sector will be discovered when the CBN pushes through its recapitalisation reform.

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