CBN’s proposed capital raise for banks seen boosting foreign investments

Some experts in the financial industry have said that the proposed bank recapitalisation would boost foreign investments into Nigeria which could help drive the realisation of the country’s $1 trillion economy target by 2030.

This comes at a time when foreign investment inflows are at their lowest in 27 months. According to the National Bureau of Statistics (NBS), investments in Africa’s biggest economy declined by 33 percent to $1. 03 billion in the second quarter of 2023 from $1.54 billion recorded in the same period in 2022.

It also reduced on a quarter-on-quarter basis by 8.8 percent from $1.13 billion in Q1.

“Banks are not well capitalised to drive activities in the economy. So, the recapitalisation would restore investors’ confidence and make the sector attractive, especially at a time when the yield environment is rising,” Temitope Omosuyi, investment strategy manager at Afrinvest Limited, said.

He added that the recapitalisation will not only make the sector attractive to investors but will also boost their confidence that the Nigerian financial sector is resilient amid incessant shocks to the financial market and global economy.

Adeola Adenikinju, a professor of economics and president of the Nigerian Economic Society (NES), said the country should position the banks to be able to play in the big leagues so that they can provide investment support for the real sector of the economy and take up risks. “It is not normal that the financial sector is growing and other sectors are not.”

He added that the recapitalisation will show investment banks from abroad that the Nigerian banking sector is strong which would open up financial opportunities for local banks.

“They will be able to access more opportunities abroad because international banks will know that they are strong and can attract investments whether through the capital market or other sources to finance big investments locally,” he said.

Yemi Cardoso, governor of the Central Bank of Nigeria (CBN), said last Friday that the apex bank would be directing banks to increase their capital to serve a $1 trillion economy.

“We need to ask ourselves: Will Nigerian banks have sufficient capital relative to the financial system’s needs in servicing a $1.0 trillion economy in the near future? In my opinion, the answer is “No!” unless we take action. Therefore, we must make difficult decisions regarding capital adequacy,” he said.

Nigerian banks’ capital adequacy ratio (CAR) measures a bank’s financial strength by using its capital and assets. The current CAR in Nigeria is 10 percent for local banks and 15 percent for banks with international operations.

Data from the CBN’s latest monthly report show that banks’ CAR rose to 13.0 in May 2023 from 12.8 in the previous month. But reduced year-on-year from 14.4 in the same period last year.

“The banking industry remained safe, sound and resilient, as key indicators were within prudential benchmarks. The banking CAR remained above the 10.0 per cent benchmark for banks with national/regional authorization,” the report said.

It said the CAR rose slightly by 0.2 percentage point to 13.0 percent, from the level at the end of April, driven by a marginal increase in total qualifying capital over movements in total risk-weighted assets.

During the banking consolidation exercise of 2004, the minimum capital requirements for banks were raised from N2 billion to N25 billion. The revised capital requirement was an equivalent of $187 million.

“The capital base has shrunk by inflation and the devaluation of the naira. So, we need to push it up to the level it was in 2005. When you increase your capital, you get more investors, sell shares, do Initial Public Offering (IPOs) and rights issue,” Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said.

He added that a bigger capital base also enhances the banks’ capacity to do bigger business and investments. “From those points of view, it helps the economy because you have more muscle to do more business.”

Ayodele Akinwunmi of FSDH Merchant Bank Limited, noted that the recapitalisation will allow the banks to be well-capitalised to continue to support the economy given the recent changes in the economy.

He said it would attract foreign investors into the banking industry through Foreign Direct Investments, therefore helping the country to drive part of the much-needed long-term foreign currency investment into the important and attractive sector to stabilise the value of the naira.

Analysts at Comercio Partners noted that the planned recapitalisation could lead to increased activity in the capital market, presenting an opportunity for financial advisory firms to play a pivotal role in navigating the evolving landscape.

Africa’s most populous nation grew by 2.54 percent in Q3, largely steady from the 2.51 percent in the previous quarter, as the oil sector contracted at a slower pace while the impact of government reforms aimed at boosting output was yet to take effect.

According to the NBS, the country’s gross domestic product rose marginally by 2.54 percent (year-on-year) in real terms in Q3 from 2.51 percent in Q2 and 2.25 percent in the same period last year.

“The government is trying to grow the economy into a $1 trillion one, where they can have big investments in the oil sector, infrastructure, industry and agriculture. So, we need banks that can do big investments and withstand global volatilities,” Adenikinju of NES, said.

President Bola Tinubu in May scrapped a costly but popular petrol subsidy and lifted currency controls in June, which he said was to save the country from going under.

But his actions have worsened inflation currently in double-digits and at the highest level in 18 years. The rising inflationary pressures have weakened the purchasing power of consumers, even as businesses grapple with higher operating costs.

The removal of the petrol subsidy tripled the petrol price to N617 from N184, causing public transportation providers such as buses, tricycles and motorcycles to raise transportation fares.

Read also: CBN’s bank recapitalisation plan for $1trn economy raises questions

The naira has plunged to record lows across markets since the central bank allowed it to weaken by as much as 40 percent against the dollar in June.

The high cost of dollars and the implementation of a 7.5 percent value-added tax on diesel imports, which was suspended last month in September, pushed its pump price to as high as N1,200 per litre.

The country’s inflation rate, a measure of the general price level, rose to 27.33 percent in October from 26.72 percent in the previous month, according to the NBS.

The latest monthly Purchasing Managers’ Index by Stanbic IBTC Bank showed that business activity contracted in October for the first time in seven months.