Considering Nigeria’s fast-evolving economic realities, there may be the need for the country’s banks to recapitalize, if President Bola Tinibu’s dream of growing the economy to $1 trillion in the next four years must come to fruition.
The minimum capital requirements of the banking industry need to be reviewed in the light of the considerable loss of value amid depreciating domestic currency. During the banking consolidation exercise of 2004, the minimum capital requirements for banks was raised from N2 billion to N25 billion. The revised capital requirement was an equivalent of $187 million. Today the same N25 billion is an equivalent of circa $30 million. This is a clear indication of the phenomenal erosion of the capital base of the banks. If the exercise is not carried out, besides the potential to grow the economy, Nigeria risks being uncompetitive in relation to other emerging economies.
According to the chief executive of the Center for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, recapitalisation of the banks has therefore become imperative. “It is important to ensure that the capital base of banks can support their current exposures in the interest of the stability of the financial system.”
The lack of adequate capital may be the reason Nigeria’s commercial banks’ credit to the private sector is low compared to other emerging economies. According to data disclosed by the CPPE, the banking system’s credit to the private sector in Nigeria, as of 2022, was a mere 20.6 per cent of the nation’s GDP, as sub-Saharan Africa averaged of 28 per cent, and global average was 145 per cent. Besides, according to the data, small businesses which account for an estimated 50 per cent of the GDP have access to just about 1 per cent of the credit in the banking system.
The implication is that the Nigerian banking system is still largely disconnected from the investing community, especially the small businesses in the economy. Special advisor to President Bola Tinubu on PEBEC and Investment, Dr. Jumoke Oduwole, recently said there are 39.7 million MSMEs in Nigeria today, which account for roughly 96 per cent of businesses and 88 per cent of jobs. Financing gap in the small business space has been estimated at over N600 billion.
Reacting to the potential to increase Nigeria’s GDP if the banking industry provided adequate capital to Nigeria’s investors, the president, Independent Shareholders Association of Nigeria(ISAN), Moses Igbrude, said the impact would be so tremendous that wealth creation would increase, jobs creation would increase, and the business space would expand because the main driver of the economy are small businesses.
He said that’s the trend in India, China and other Asian countries. He, however, caveated that the cost of finance is huge; but noted that one cannot blame the financial institutions because the system is not well-structured to give credit and expect returns.
A critical aspect of economic development lies in deepening financial intermediation, a process that can significantly bolster the nation’s resilience in the face of economic shocks, promote inclusive growth, and create a more stable and prosperous future for citizens.
Financial intermediation, at its core, is the process of channeling funds from savers and investors to those who need capital for various economic activities. This vital role is predominantly played by financial institutions such as banks, insurance companies, and microfinance institutions. Deepening financial intermediation implies expanding the efficiency, accessibility, and inclusivity of financial services, thereby improving the allocation of resources and reducing economic vulnerability.
The need for Nigeria to deepen financial intermediation is underscored by several compelling reasons, including enhanced access to capital. A financial economist at Nnamdi Azikiwe University, Dr. Felix Echekoba, noted that, “By deepening financial intermediation, Nigeria can broaden access to capital, especially for SMEs and individuals. These businesses are the backbone of the economy and can thrive with improved access to affordable credit and financial services.”
He added that deepening financial intermediation can make Nigeria more resilient to economic shocks and fluctuations. He stressed that a robust and diversified financial system can help absorb shocks and reduce the impact of economic crises, ultimately promoting stability.
Also, Dr. David Olaleye, a retired lecturer of economics, noted that deepening financial intermediation can engender inclusive growth. He said a more inclusive financial system can reduce income inequality and promote equitable growth, stressing that when marginalised groups and regions gain access to financial services, they can participate more actively in economic activities, fostering balanced development.
He further said a thriving financial sector can create jobs and boost employment opportunities, particularly in the fintech and banking sectors. “As the financial system expands, it provides job opportunities for skilled professionals and entrepreneurs,” he said.
Moses Igbrude also noted that deeper financial intermediation encourages higher levels of investment and savings, which are critical for long-term economic growth. Individuals and businesses are more likely to save and invest when they have confidence in the financial system.
He said adequate financing is crucial for infrastructure development. A deeper financial system can provide the necessary capital for building and maintaining vital infrastructure, including roads, ports, and energy facilities.
Dr. Muda Yusuf, the chief executive of CPPE noted that it is especially imperative to deepen the financial intermediation role of the deposit money banks, which is their primary role in an economy.“This responsibility entails the mobilisation of financial resources from the surplus end of the economy, to the deficit segment of the economy. Financial conditions remain very tight for the private sector amid challenges of access and cost of credit.
“This anomaly needs to be corrected. All these underscore the need to deepen synergy and complementarity between the banking system and the economic players, especially the MSMEs.
“The key metrics of the depth of the financial system include the ratio of financial assets to GDP; ratio of deposit liabilities to GDP; and ratio of money supply to GDP. Nigeria’s rating on account of these ratios is still very low, compared to other emerging economies. Therefore, deepening the financial system for stability is very critical.
“There is a need to reduce the ratio of non-interest income as a percentage of income of banks. The ratio was 42.5 per cent two years ago and would have gone up by now given the numerous headwinds confronting investors in the economy. In most developing economies, the ratio is less than 30 per cent.
“This income structure is a reflection of the failure of financial intermediation in the economy. This, therefore, needs to be addressed. The core function of the banking industry is financial intermediation. A situation where non-banking activities are crowding out the financial intermediation functions of the deposit money banks is detrimental to the growth of the economy,” he stated.
He further said the spread between deposit and lending rates in the Nigerian banking system is too high, stressing that it is an indication of serious efficiency issues in the banking system.
“In Nigeria, the spread is over 20 per cent, one of the highest globally. The average for sub-Sahara countries is 10 per cent and the global average is about 6.6 per cent. The large spread is detrimental to investment growth and disincentive to savings,” he said.
Another economist, Dr. Livinus Ezeibe, noted that Nigeria’s banking sector is the lifeblood of the nation’s economy, playing a crucial role in its growth and stability. “However, to ensure a robust and resilient financial system, it is imperative for Nigeria to consider increasing capital requirements for its banks. This move will fortify the sector against economic shocks, enhance depositor protection, and promote financial stability.
“A higher capital buffer equips banks to weather economic storms, ensuring they remain solvent even during financial crises. This stability is not only essential for the institutions themselves but also for the entire financial system, reducing the risk of systemic failures,” he said.
“Increased capital requirements encourage prudent risk management by banks. When banks are required to hold more capital, they are less inclined to engage in excessively risky lending practices, thereby reducing the potential for bad loans and financial crises.
“Strengthening capital requirements safeguards the deposits of ordinary citizens. When banks have a larger capital cushion, they are better prepared to honor their financial obligations, even in turbulent times, ensuring that depositors’ funds remain secure,” he added.
