CBN eases Capital Pressure on Struggling Banks
Nigeria’s central bank has given the country’s lenders some much-needed relief by extending the time they will have to implement stricter accounting rules for bad loans.
Lenders in the West African country now have four years to absorb impairments arising from the implementation of IFRS 9 accounting standards last year, thereby easing fears that an immediate transition would have severe repercussions for banks’ capital adequacy ratios. IFRS 9 requires them to have enough capital to cover existing losses and potential future losses.
“The total provision amount is to be absorbed over the next four years in four equal parts” to cushion the effect, the Central Bank of Nigeria said in an emailed response to questions. Some banks had said the migration would cut as much as 400 basis points from their capital bases.
The decision “is a good development for the banks as it gives them more time to either raise capital or build up more capital from retained earnings over the four-year period,” Tunde Abidoye, a banking analyst at Lagos-based FBNQuest, said by phone. Most small and medium-sized banks have capital adequacy ratios close to the regulatory minimum, he said.
Lenders with international licenses are required to have a minimum capital adequacy ratio of 15 percent and those with local licenses 10 percent. The industry average rose to 12.1 percent in June from 10.2 percent at the end of 2017.
While the regulator wants to protect the industry from unforeseen shocks locally and abroad following a 2016 recession, many smaller lenders are battling to raise capital. In September, the central bank revoked Skye Bank Plc’s license, while Access Bank Plc agreed to take over struggling local rival Diamond Bank Plc in a deal worth about $200 million.
The central bank also plans to introduce new capital rules in the second quarter that will be stricter about what sort of funding qualifies as capital. The rules, which will align the banking industry with the international accord known as Basel III, also require lenders to create buffers that should help them in the case of a crisis.
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