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FG, tread softly with banking sector recapitalisation

FG, tread softly with banking sector recapitalisation %Post Title









As the saying goes: “To stumble on the same stone twice is a proverbial disgrace.” This wisecrack is more than a timely counsel as Nigerians eagerly await the fallout of the planned implementation or otherwise in the new policy regime announced by Dr. Olayemi Cardoso, the Governor of the Central Bank of Nigeria.
The issue is that the apex bank plans to recapitalise the commercial banks, just as the CBN boss has made other rafts of fresh policy pronouncements to turn the tide in the economy. Speaking during the 58th Annual Bankers’ dinner and grand finale of the 60th anniversary of the Chartered Institute of Bankers of Nigeria, in Lagos recently, Cardoso hinted of plans by the apex bank to carry out another fresh recapitalisation exercise for the commercial banks in line with the planned expansion to a $1 trillion sized economy declared by President Bola Tinubu.

He based the inevitability of that decision on the need to make Nigerian banks globally competitive.

The decision itself is a great idea, but may not be good at this time because the circumstances are entirely different from the last time the apex bank forced banks to recapitalise in 2004. That was when a former Governor of the CBN, Prof. Charles Soludo, raised their capital base from N2 billion to N25 billion.

From the look of things, Cardoso is trying to over romanticise the idea of making Nigerian banks join the big league without clearly understanding the salient issues involved. Certainly, going ahead with the idea will have its own momentary gains.

Of course, once the inevitable happens, big banks will be swallowing smaller banks up as happened in the heady days of implementing the Soludo-led banking consolidation exercise. But definitely, the country will contend with even far greater challenges, which will make a mincemeat of the current economic upheavals.

Clearly, the signs this time around are very ominous, indeed for every discerning Nigerian to see. From available information, the majority of the banks, which could not raise the funds to meet with the N25 billion benchmark set at the last recapitalisation are not only non-existent today, but most of the unfortunate staff suffered lots of privations, lamentably so.

For instance, 21 years after the Soludo recapitalisation exercise, majority of the banks’ staff are yet to receive their severance packages just as hundreds of thousands are still in arbitration court trying to get justice, which seems far from being achieved, even as there have been human casualties too, amongst them women, children and relatives of the victims of the banking consolidation exercise.

Sadly, the issues that arose out of the recapitalisation project under Soludo happened in part because the managers of the economy at the time failed to carry out due diligence as far as the assessment of the assets and liabilities of the banks were concerned such that the new owners, many of who cheated the system, are relishing their victory till date. Talk of robbing Peter to pay Paul kind of scenario.

The question of the hour therefore is: Where does Cardoso want to raise these ever-elusive funds? Is it from the moon?

At a time there is growing investor apathy and animosity across the wide spectrum of venture capital and hedge funds from foreigners, added to the poor purchasing power of the locals, raising fresh capital would certainly be a tall order indeed. Capital only moves to where it is safe and not in a toxic environment as we have seen play out in Nigeria overtime.

Let’s even wager that the monies would come alright, but have we asked ourselves what happened during the Soludo era when some smart alecs mobilised illicit funds to the banking sector all in the name of banking consolidation?

Even if we have to concede that the government means well with this new policy regime judging by the spike in inflation rate, which has seen the value of the naira nosedive beyond redemption as high as N1,115/$, but have we also considered the fact that pursuing a $1 trillion size economy with a GDP growth rate of less than five percent is not ennobling at all, except of course we want to practise voodoo economics?

Now, what does the size of an economy mean to the common man on the streets who cannot afford to put food on his table, even if it is a “one square” meal?

The government doesn’t need to delude itself at all that things will look up once the economy achieves the utopian size and status it is dreaming up. No. What would make the difference at all is if the prices of essential goods and services are not priced out of the reach of the common man.

The first law of nature is the law of self-preservation. The only language a hungry man understands is that once he is experiencing the pang of hunger, can he buy garri, yam, tomato and even easily access water to prepare himself an honest meal. That is what is fundamental to him.

All said, the key word here therefore is that those currently holding the levers of the economy should err on the side of caution: They should tread softly and let Nigerians breathe please!

Of course, judging by the policy brief of the CBN, the apex bank may have passed a fait accompli on the Deposit Money Banks such that they’re left with a Hobson’s choice and no choice at all in a manner of speaking! If these assumptions are right, then it bears stating here that the banks need to gird up their loins and think up means and ways to survive what may well be a tsunami waiting to happen ahead of the soon-to-be announced new capital base sum.

Truth be told, there are a multiplicity of options open before the DMBs. First off is mergers and acquisitions by bigger banks as happened during the Soludo era, where smaller banks were swallowed up by the bigger banks. This may well be the low-hanging-fruit as a matter of fact.

But again, we plead caution. The parties must consider and factor in the possible fallouts of these mergers and acquisitions, especially the effects on job losses such that the casualties are brought to the barest minimum. There may be a need for the Nigeria Deposit Insurance Corporation to ensure that proper due diligence is carried out by ensuring that depositors’ funds are not put in jeopardy by the acquiring banks and vice versa, just as there must be proper valuation of the assets and liabilities of the banks to take care of all exigencies that may possibly arise when the policy is being fully implemented.

Another major source of raising the fresh capital would be at the capital market, especially for publicly quoted banks, where they can sell a unit number of shares in form of commercial papers, debentures to old and prospective shareholders. This can help bring in fresh capital at cheaper cost to the banks in the long run.

The other route, of course, is to ask the shareholders to bring in more money in order to raise their equity holdings in the banks. This should not be difficult at all if the terms and conditions guarantee better ROI for the shareholders.

Finally, the banks can seek out institutional investors like development finance institutions operating locally and overseas for a tenor-base loan just as hedge fund investors can come in very handy in times like this. It is however instructive to note that the options open to the banks are by no means exhaustive but subject to some strategic policy interventions by the apex bank in the areas of monetary policies, supported keenly by other fiscal policies by the authorities, which are all expected to give a human face to the recapitalisation exercise. Unless that happens, we may as well be skirting around the whole idea of recapitalisation with a human face. No more, no less.

•Editorial By The Eagle Online
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