By Chris Enyinnaya

The Central Bank of Nigeria (CBN) successfully concluded the recapitalisation exercise of deposit money banks with many of them meeting the benchmark minimum capital.  This is not the first time the CBN is legislating Bank capital. The last one was done in 2006 during the tenure of Prof Charles Chukwuma Soludo as Governor. Unlike that exercise in which there was revocation of licenses due to inability of some banks to meet the capital requirements or merge, there were nothing like that in the just concluded exercise. 

Nevertheless, previous experience suggests that there is still an unfinished business regarding the bank recapitalisation exercise. 

As my Igbo people will say, agbacha oso agua mile meaning after a marathon race, the organiser measures the distance covered by participants. Yes, after recapitalisation, the CBN should check whether what banks booked as capital in their balance sheets are actually capital and if banks remained healthy and strong after recapitalisation .

I am raising this point because , my daughter  Glory Amara Enyinnaya as part of requirement for award of Bsc Accountancy degree of the University of Nigeria in 2006, submitted project work titled” Repositioning The Nigerian Banking Industry Through Recapitalisation (The International and Access Bank Experience)

This 345 page thesis was lodged with the management of the sampled banks in 2006. She holds a PhD now.

Empirical evidence was gathered, and analysed using the CAMEL rating system.  This system evaluated five critical aspect of each bank’s operations as follows: Capital Adequacy, Asset Quality, Management and Administrative ability, Earnings Level and Liquidity. These are summarised in the acronym CAMEL. The analysis was conducted on a case -to-case basis and utilised Intercontinental and Access Bank as case studies.

After comparing the figures for 2005 and 2006,the following startling revelations were unveiled:

The capital Adequacy position of the sampled banks worsened after Recapitalisation. This is the antithesis of what pundits predicted. 

The quality and level of loans and advances improved after recapitalisation. This has favourable connotation for the economy. 

The managerial and administrative ability of the sampled banks improved after recapitalisation. 

The level and quality of earnings of the sampled banks declined after recapitalisation 

The Liquidity profile of the sampled banks worsened after recapitalisation.  

If one may ask, why the  mixed outcome of critical issues after  recapitalisation? The new capital was achieved through a combination of financial engineering and balance sheet restructuring.  Many of the banks approached the capital market to raise fresh capital. What many of them did was to use deposit liability in their portfolio to buy shares and then when the shares are listed, they offloaded it, raised the cash and used it to replace the deposit liabilities. This is round tripping bank deposit. 

In effect, what the bank has is “bubble capital”. It took Soludo’s successor in office, Sanusi Lamido Sanusi whose specialist area in banking is credit management to unveil this because the banks that did so were constantly patronising the CBN Liquidity Window. He was able to identify three or four banks that had bubble capital and promptly took them over, sacking the board of directors and management of the banks in the process.

The speed with which all the banks met the capital requirements of N500b, N200b and N50b raises the question where the capital inflow came from in this cash strapped economy.

The recent revocation of the operating licenses of many Micro Finance banks raises the question: Is everything well with the Nigerian Banking Industry?” Don’t be deceived by the huge profit being declared by banks. At a time past, Roles Royce of UK collapsed after declaring profit. Declaration of profit is no proof that the institution is financially healthy.

In the 2006 recapitalisation exercise, the CBN left loop holes which was exploited by banks to easily meet the N25b benchmark capital requirements. The CBN defined capital as shareholders funds. This meant cash plus reserves plus retained earnings .That is to say, bank capital consists of cash plus non-cash items. It is the non-cash component of the capital element that banks used to engage in financial engineering to meet the N25b capital requirements. 

This writer will suggest that the CBN employ CAMEL rating standard, pre and post recapitalisation, if they have not already done so, to evaluate the health status of banks. Furthermore, it must be noted that what determines the financial strength of a bank is not necessarily the bank capital. The strength of a bank is determined by the stability of its deposit liabilities. This is because banking is a highly leveraged business. In fact the deposit liability of a bank constitute working capital. Working capital is capital.

There is no doubt that legislating bank capital into tiers of N500b, N200b and N50b by the CBN is aimed at maintaining a sound and stable banking system where there is no threat of bank failure. However, it must be noted that the soundness of the banking system cannot be achieved by legislation alone.

According to Dr (later Professor) W. Okefie Uzoaga (1986) …” large capital resources place banks in a better position to absorb unanticipated losses. But unless the management is honest, competent and cautious, large capital resources in the long run would not be safe from erosion. Bank failure in Nigeria have been largely associated with devaluation, incompetent accounting and incautious credit policies….Banking legislation that concentrates on the increase of bank’s capital without corresponding concern for quality and development of management cannot successfully produce a sound banking system.

As I write, there is a dearth of skilled manpower in the banking industry. Many bank staff are not interested in writing the examination of the Chartered Institute of Bankers of Nigeria that is responsible for training and licensing professional Bankers. For deposit money banks, the advent of technology in banking business that requires use of banking softwares have caused bank to disengage in training of bank staff because all you need to work in the bank is ability to punch the computer keyboard. Banks no longer train staff in critical areas of Banking Operations, Treasury management, Credit Analysis and Administration.  In fact many banks don’t even have training schools for continuous education of its staff.

The CBN should step up bank supervision in the area of manpower training and development. Banks need well trained staff to manage the vastly increased bank capital base.

Enyinnaya, Fellow Chartered Institute of Bankers, wrote via:  [email protected]