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AfricaOctober 3 2004

New rules for banks

Central Bank of Nigeria governor Charles Soludo talks to The Banker about his plan to increase banks’ minimum capital requirement.
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Central Bank of Nigeria governor Charles Soludo sparked a stormy debate when he announced that banks would have to increase their minimum capital from N1bn ($7.5m) to N25bn in just 18 months. He argues that the move is designed to avoid an “imminent systemic crisis”. Most bankers agree on the objective but dispute the method. Here he gives his opinion on some of the most talked-about points of his plan.

Q Is the N25bn minimum capital base too high?

A No, [Nigeria’s two largest banks] First Bank and Union Bank have capital of N35bn each and yet neither can fund a major investment project requiring $500m or more. N25bn is equivalent to $180m, or just 0.25% of gross domestic product. Compare this with Standard Bank of South Africa, with capital equal to 4% of GDP respectively.

Q Is the 18-month time frame too short?

A No. In fact it is very generous. Many countries have completed such restructurings in 12 months. We have tried to be generous by giving an extra six months. A central bank lives on its reputation and credibility. We do not want to announce a date and begin to grant extensions.

Q Given the sensitivities surrounding the government’s reform programme, will bank restructuring lead to the loss of jobs?

A Not necessarily because if we do not act now, more jobs would be lost if we close the 11 banks that are already technically dead, which could trigger a run on other banks, with up to 40 banks at risk of collapsing. The question is whether we would lose more jobs under the present restructuring plan than if we do not act. The answer is no.

But you must also look at that question from a different angle: how many hundreds of thousands or millions of jobs are currently being lost or not created because banks are not lending to the productive sectors of the economy?

Q Is there room for very small banks?

A Yes. To open a community bank in Nigeria, owners need just N5m or $35,000. And many of the community banks are doing better than the so-called commercial banks. We will strive to strengthen community banks, which cater better for poor, small customers.

Q How will the Central Bank of Nigeria assist banks in restructuring?

A There will be a technical assistance team, including both Nigerian and foreign experts, that will offer free consulting services. There will also be a structure of incentives while the Central Bank of Nigeria will pick up some of the direct costs.

Q In addition to avoiding a systemic banking crisis, what are some of the other motivations for the reform?

A We want to fight corruption. There were 1036 cases of fraud in the banking sector last year – it had become a haven for corruption. It is very expensive and problematic to effectively supervise and police so many banks, many of which are desperate to survive and are engaging in sharp practices. We believe consolidation will improve transparency and accountability in the sector.

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Read more about:  Africa , Nigeria