Why the new minimum capital base for tier-one banks in Nigeria should be at least $5 billion

The issue of minimum capital base for deposit money Banks once again came to the front burner when the CBN governor recently indicated that there was a need to raise the minimum capital base of deposit money banks to put them in a position to support the one trillion-dollar economy that the current administration is targeting.

Even though Nigerian banks have been doing relatively well and some people think that there is no need for a new minimum capital base for the industry, the reality is that compared to the size of our economy, the Nigerian banking industry is grossly under-capitalized and lacks the capacity needed to adequately fund the growth of the economy.

It is itself a contradiction that even though Nigeria has the biggest economy on the African continent, no Nigerian bank is amongst the top ten most capitalized banks in Africa. Though the list of biggest banks in Africa is dominated by South African banks, banks from countries with much smaller economies like Morrocco, Algeria, and Egypt also made the list of the top ten most capitalized banks in Africa.

The other irony is that one single bank in South Africa, (Standard Bank Group) has more tier-one capital at $13.2 billion than all the top ten banks in Nigeria which have a combined tier-one capital of less than $12 billion. When we take into context that Nigeria has a much bigger economy than these other African countries and a population that dwarfs most of them, we begin to realize that our banks need to be more adequately capitalized to fund the economic growth that we so much desire.

Before we go on to discuss what should be the ideal minimum capital base for deposit money banks in the country, I would like to refer to that last capital raising exercise carried out during the Obasanjo administration which even though was deemed to be successful, failed to achieve the ultimate objective empowering banks to fund the productive sector of the economy.

Even though the 2005/2006 bank capital raising exercise was very successful with the industry tier one capital increasing by over 200% within a space of two years, the increased capital in the industry failed to translate to increased funding for the productive sector as the government’s appetite for funding also increased significantly with a resultant effect of the government crowding out the productive sector from the money market.

This was despite the fact the newly reformed pension industry was also accumulating trillions of Naira in pension funds which greatly increased liquidity in the financial services industry yet despite this up to 70% of the funds available in the industry went to the government in form of Bonds and Treasury bills, while most of what was left of the 30% went towards financing the big corporates and multinationals leaving very little to support Small and Medium-scale Enterprises (SMEs) that are the engine of growth in the economy.

For the proposed bank capital raising exercise to achieve its aim of supporting the growth of a one trillion-dollar economy, the increased capital of the banks must be directed towards enhancing the capacity of the banking industry to fund SMEs to stimulate growth in the economy. The practice of government cornering most of the available funds in the financial industry to finance unproductive activities must stop and the government must be more focused on supporting the growth of our SMEs which will not only ensure job creation and economic growth but will also ensure increased government revenue through taxes.

As of today, less than 3% of Nigerians have access to loans from the formal sector, and in a thriving economy, this figure should be at least 70%. However, our bankers have failed to develop the credit system in the country as it’s much easier for them to earn fat interests and fees from government securities than to do the hard work of managing millions of small lenders with the higher attendant risk associated with lending to them.

Given Nigeria’s status as the biggest and most populated economy in Africa, it is not out of place to expect that Nigerian banks should be amongst the biggest on the continent. Also, benchmarking what our African peers are doing, will help us to arrive at what should be the minimum capital base for banks in the country.

With $13.2 billion in tier-one capital the Standard Bank group of South Africa is the most capitalized bank in Africa. This is followed by the National Bank of Egypt with $7.3 billion, Compatriot Banque Misr also of Egypt with $7.2 billion, Ned Bank of South Africa with $5.9 billion, First Rand of South Africa with $5.5 billion, Attijariwafa Bank of Morrocco with $5.4 billion, ABSA of South Africa with $5.3 and Banque Centrale Populaire of Morrocco with $4.9. In contrast, Zenith Bank which is the most capitalized bank in Nigeria in terms of tier one capital has a capital base of $2.6 billion while it ranks as the twelfth most capitalized bank on the continent.

It is clear from the above summary that if banks in much smaller economies than Nigeria have tier-one capital running into several billions of dollars, Nigeria with a much larger economy and massive population will certainly need more for us to remain competitive with our African counterparts and it is based on this that I believe that the minimum capital base for tier one banks in Nigeria that are licensed to operate internationally should be at least $5 billion while the minimum capital base for banks licensed to operate nationally should be at least a billion dollars. The minimum capital base for regional and other categories of banks should also be reviewed accordingly.

As suggested in my previous article, rather than wield the big stick on banks that are unable to meet the new capital requirements, banks should be incentivized to meet up with the new capital requirements, and those that are unable to meet up allowed to play in smaller niche markets that their capital base can accommodate.

With the new capital base in place, the focus of our fiscal and monetary policy should be such that lending would be encouraged to the private sector to boost both production and consumer demand. This effectively means that the government should drastically reduce its borrowing from the money market so that there are more funds available for the private sector in terms of fiscal policy while efforts are put in place to bring down interest rates in terms of monetary policy.

With the new system in place, the average Nigerian entrepreneur or even consumer should be able to access bank credit and this will increase economic activities both on the demand and supply side thus accelerating economic growth while banks significantly increase their asset size. We will effectively be developing a credit culture in our society where the average citizen will easily be able to access credit and expected to pay it back when due.

The downside of this credit system that bankers are apprehensive about is that some Nigerians may take advantage of the system and deliberately default on loans extended to them but that is where the credit rating agencies come in as defaulters would be blacklisted from all sorts of credit in the country until they liquidate their outstanding obligations and as time goes on Nigerians will begin to realize the benefit of good credit ratings when they see their contemporaries being able to access higher and higher amounts of credit for maintaining a good credit score while those with poor credit score are denied access to credit.

With the development of the credit culture in our economy, we will be able to unlock a lot of our economic potential which will in itself trigger rapid economic growth for the benefit of all Nigerians.

Kudos to the CBN governor for this initiative to increase the capital base of the banking industry but he must understand that if this increased capital base doesn’t translate to a significant increase in lending to the private sector, it will be another exercise in futility. I wish him all the best.

Oshobi, a Development Economist and Management Consultant writes from Lagos.