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AfricaOctober 3 2004

Mixed reaction

Some bankers accept that, in the long run, a higher capital requirement is necessary to strengthen institutions. But some are unhappy about the impact on smaller banks and about the difficulties of raising capital.
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Nigerian bankers are increasingly resigned to the fact that Central Bank of Nigeria (CBN) governor Charles Soludo is unlikely to backtrack on his directive to banks to increase their minimum capital requirements from N1bn ($7.5m) N25bn by the end of next year. And, according to Godwin Oboh, managing director and chief executive of Union Bank of Nigeria, banks accept the merits of consolidation in the sector.

“We, as bankers, have come to agree that consolidation is a good thing for this country. In the end, we will have strong banks and the incidence of distress will be minimal or non-existent. We have all come to terms with it,” he told a press briefing following a Bankers Committee meeting.

Positive impact

Aig Aig-Imoukhede, managing director of Access Bank, said that, while banks had not been very enthusiastic about the directive initially, they now recognised the positive impact that it would have on the industry and the economy in general.

“It takes some time to get used to something new and as time is passing, clearly within the industry, we are assimilating and understanding the fundamental benefits of consolidation and we are buying into the idea. And therefore, do not be too surprised when you find bankers who were reluctant to come to terms with it, being the strongest advocates of it,” he said.

It is a political coup for Mr Soludo, who faced a storm of protest after announcing the directive on July 6. Commentators from all quarters denounced it, arguing that it would destroy jobs in the sector or, worse, cause an economic collapse if uncertainty led to a loss of confidence in the banking system. The hubbub even reached the legislature and lawmakers called for Mr Soludo to be reigned in, undermining the CBN’s independence.

Now that Mr Soludo appears to have bankers’ support for the move, it probably has the critical momentum to be carried through.

Concerns remain

Other bankers still have concerns, however, and express them in more measured terms. Bimbo Olashore, managing director of Lead Bank, believes the time frame is unrealistic. “The CBN has indicated that the motive behind the increase in minimum capital is to drive consolidation. But can the CBN and the Securities and Exchange Commission manage the supervisory function with so much corporate action? Is the legal framework in place? Are the law courts up to the process? Is 18 months really enough time to identify acquisition targets or merger partners, do the due diligence and do the necessary shareholder consultation? How do I value my business – on a break-up basis or going-concern basis? These are practical realities that I do not think have been properly considered,” he says.

The uncertainty this fuels creates risks. “What happens at the end of next year when banks are short of the N25bn requirement? Are all deposits safe if there is a sudden loss of confidence in the banking system? Will the authorities ring-fence the system?” he asks.

Mr Olashore also believes the hike in minimum capital requirements should exclude niche banks, such as Lead Bank. “We have no intention to be a large retail or corporate bank,” he says.

Mr Soludo frequently points out that each of South Africa’s largest banks is better capitalised than the entire combined capitalisation of the Nigerian banking sector. But in South Africa, minimum capital requirements are based on a percentage of assets, allowing for different size banks to operate.

Funds warning

Tayo Aderinokun, managing director of Guaranty Trust, warns that Nigeria’s shallow capital markets will not be able to meet the funding needs of a number of banks simultaneously going to market to raise capital. “Although the intention behind

the move is consolidation, there will be banks that tap the market for funds,” he says.

He also flags up the risk to depositors. “Bankers know the market and they know who the ‘bad apples’ are. These banks will be excluded from consolidation. What will happen to these banks?” he asks.

Mr Soludo remains committed; despite the challenges, banks are reluctantly coming on board.

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Read more about:  Africa , Nigeria