Bank Recapitalization: Independent shareholder associations seek tiered approach

Nigerian shareholders have called upon the government and the Central Bank of Nigeria (CBN) to adopt a tiered approach to recapitalization requirements for banks, taking into account their operational scope.

In exclusive interviews with Nairametrics, shareholders emphasized that implementing a tiered system would safeguard the existence of smaller, regional players within the banking landscape.

The shareholders believe that a well-designed and executed recapitalization program can significantly benefit the Nigerian banking sector, fostering economic growth and promoting financial inclusion.

They argue that a one-size-fits-all approach to capital requirements could inadvertently stifle smaller banks, hindering their ability to serve local communities and contribute to regional economic development.

Furthermore, the shareholders acknowledged the potential for a well-managed recapitalization to strengthen the overall stability and resilience of the Nigerian banking system.

By enhancing capital adequacy, banks would be better equipped to weather economic downturns and support lending activities across diverse sectors, ultimately contributing to broader economic growth.

Additionally, increased financial inclusion could be achieved by ensuring continued access to banking services for individuals and businesses in underserved regions.

The CBN Governor, Olayemi Cardoso recently during his keynote speech at the 58th Annual Chartered Institute of Bankers Dinner announced that banks will be required to raise their capital requirement in other to be able to service a $1 trillion economy.

Cardoso had said, “It is not just about the stability of the financial system in the present moment. However, we need to ask ourselves, will Nigerian banks have sufficient capital relative to the financial system needs to service a $1 trillion economy in the near future?

What the shareholders are saying: The National Co-ordinator of the Independent Shareholders Association of Nigeria, (ISAN) Mr. Moses Ibrude in an exclusive chat with Nairametrics said that the government and the CBN should implement a tiered capital requirement system.

According to him, the system would categorize banks based on their operational scope (regional, national, international) and assign corresponding capital requirements.

“The federal Government should not compel the banks to recapitalize but encourage them to get the capital base they can manage based on the category of their operations. They should categorise the capital requirements of the banks based on their scope of operations such as regional, national and international coverages. “This tailoring ensures that capital requirements are proportionate to operational risks and promotes a level playing field for banks within each category,” he said.

To ensure smooth transitions, Ibrude said the government should provide ample time and incentives for banks to meet the new capital requirements. Additionally, he noted that the authorities should avoid favoritism and ensure fairness in the application of regulations.

While recapitalization aims to strengthen the banking system, he noted that vigilance is crucial to prevent banks from becoming conduits for illicit funds.

“The government should implement robust anti-money laundering and know-your-customer (AML/KYC) regulations, in addition to effective oversight mechanisms,” he said. To Ibrude, ensuring the recapitalization proceeds are used strategically is critical, the government should encourage banks to invest prudently, prioritize lending to productive sectors, and maintain healthy capital buffers.

He noted that the government should also explore measures to create a conducive environment for lower interest rates, promoting economic activity and financial inclusion.

Ibrude added that lower interest rates can stimulate economic growth by making credit more accessible to businesses and individuals.

He noted that a well-managed recapitalization can lead to increased activity in the capital market as more banks seek funding adding that this can, in turn, boost the overall financial system and contribute to economic growth.

Ibrude cautions banks on bloated shareholders base which can lead to share reconstruction.

“Issuing an excessive number of shares followed by reconstruction can dilute shareholder value and reduce investor confidence.

Banks should carefully consider their capital needs and issue shares in a manner that ensures sustainable growth and shareholder value creation,” he said.

The President of the New Dimension Shareholders Association, Mr. Patrick Ajudua also in a chat with Nairametrics said that shareholders are not against recapitalization of bank as the last exercise was done in 2004.

Ajudua noted that considering the policy stand of the CBN in achieving a GDP of $1 trillion by 2030 in strategic areas, it behoves on Nigeria bank as a key policy driver of the goal to recapitalize and play major role.

He underscores the current GDP growth rate of 2.5% being insufficient to reach the $1 trillion target, requiring a 15% growth rate. Ajudua suggests attracting foreign investors and growing revenue as key drivers for both the economy and the banking sector.

“But government must provide the needed framework to drive growth as the current GDP growth rate of 2.5% can’t sustain drive for $1 trillion economy which require GDP growth rate of 15%.

Therefore, more foreign investors are needed, also there is the need to grow our revenue as it’s major determinant factor as will help the banks to grow their deposit fund and be ready to be a major player,” he said.

Ajudua believes the CBN’s recapitalization value requires an appraisal to determine the level of funding needed to achieve the desired growth.

He expresses confidence in the larger banks’ ability to meet the target but requests more time for smaller banks to assess their options, including mergers and acquisitions.

“For the shareholders, the recapitalization value from CBN is required an appraisal to determine the level of fund needed to meet up with target.

“For the big banks, we believe that they are in a position to meet the target but we will request for more time to enable smaller bank to appraise their strength whether to go into merger or acquisition,” he said.

He emphasizes the timing sensitivity for retail shareholders struggling in the current economic climate. Additionally, he urges the CBN to implement robust risk management processes to prevent future erosion of shareholder funds through bad loans.

“Timing of the recapitalization is very important to retail shareholders who are presently suffering from bad economy and erosion of power to invest in the capital market. Also, CBN need to put in place strong risk management process to ensure that whenever the process is completed, measure will be in place to avoid erosion of Shareholders funds via dubious unperforming loans by directors,” he said.

Ajudua emphasizes the need to guarantee adequate returns on shareholder investments to attract and retain investors.

Joeseph Bamidele, an independent shareholder, speaking to Nairametrics exclusively believes that increased capital is indispensable for financing large-scale projects, especially in light of the government’s ambitious goal of achieving a $1 trillion economy within a few years.

He highlights the potential benefits of recapitalization, including a rejuvenated stock market, echoing the positive impact of the 2005 exercise.

While acknowledging the need for capital adequacy, Bamidele proposes a strategic shift from the 2005 approach, which he deems overly reliant on coercion. He advocates for incentivizing banks to increase their capital base rather than imposing mandatory requirements.

Recognizing the crucial role of smaller, regional banks in the financial landscape, he emphasizes the need for a balanced approach that avoids regulating them out of existence.

He suggests tailored solutions for different tiers of banks to ensure a sustainable and inclusive financial sector.