Bank Recapitalisation: Financial Expert Lists Pros, Cons

Folashade Adeniran
Mar, Sat, 2024

Economy/Business

Bank recapitalisation: Financial expert lists pros, cons

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By Olawunmi Ashafa

Mr Yemi Odusanya, former Executive Director, Corporate Banking and South, Keystone Bank, says the capital raise by the Central Bank of Nigeria (CBN) for the banks will further fortify the industry’s financial resilience.

He said it would also reduce the likelihood of failures in the future.

Odusanya said this in an interview with the News Agency of Nigeria (NAN) on Saturday in Lagos.

He said that the move could lead to several potential positive outcomes for the banking industry.

The financial expert explained that higher capital requirements couldenhance the overall stability of the banking sector, making it more resilient to economic shocks.

Odusanya noted that the new capital requirements could improve risk management as banks with higher capital levels are generally better equipped to manage risks and withstand adverse market conditions, which can ultimately benefit depositors and the broader economy.

According to him, a well capitalised banking system can boost investor and consumer confidence, potentially attracting more investment and supporting economic growth.

However, on the potential challenges associated with the new capital requirements, the former director said some banks might face challenges in raising the required capital, particularly smaller institutions, which could lead to consolidation or other strategic responses.

Odusanya further said higher capital requirements could potentially limit the ability of banks to extend credit, particularly to small and medium-sized enterprises (SMEs) and individuals, which could have implications for economic growth and access to finance.

“In order to be able to anticipate what lies ahead as a result of the newly proposed capital raise, we need to review the outcome of the 2004 banking consolidation in Nigeria.

“Recall the 2004 banking consolidation was shaped by several events, including: but not limited to poor performance of banks.

“Many banks in Nigeria were facing financial distress and were unable to meet their obligations. This led to a lack of confidence in the banking sector and a need for a stronger and more stable banking system.

“The global financial landscape was changing, and there was a need for Nigerian banks to be more competitive and meet international standards. This led to a push for consolidation and strengthening of the banking sector.

“The CBN and other regulatory bodies put pressure on banks to merge and consolidate in order to create stronger, more stable institutions,” he added.

While the new capital raise in the Nigerian banking system has the potential to strengthen the sector and improve financial stability, Odusanya suggested that it was essential to carefully monitor its impact on lending activities and broader economic dynamics.

According to him, balancing the need for robust capital levels with the imperative of supporting lending and economic growth will be a critical consideration for policymakers and banking institutions.

On March 28, the CBN announced an upward review of the minimum capital requirements for commercial, merchant and non-interest banks.

Commercial banks with international authorisation to increase their capital base to N500 billion and national banks to N200 billion.

Also, commercial banks with national licences must meet a N200 billion threshold, while those with regional authorisation are expected to achieve a N50 billion capital floor.

Similarly, non-interest banks with national and regional authorisations will need to increase their capital to N20 billion and N10 billion, respectively. (NAN)

Edited by Folasade Adeniran

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