Nigeria: New Capital Rules for Banks
The proposed new requirement is desirable. Over the past few decades, there has been a deluge of bank failures in Nigeria mostly occasioned by a cocktail of factors, chief among which are non-performing loans (NPLs).
These essentially are toxic items that arise from insider abuses often perpetrated by the top echelon in the banking sector, in collaboration with others outside the system. This is why the move by the Central Bank of Nigeria (CBN) to introduce new capital rules in the second quarter of the year must be applauded.
With the proposed rules, it is apparent that the CBN is moving to align with the global agreement reached a couple of years ago in Basel, Switzerland--otherwise known as 'Basel Three'. Figures from the National Bureau of Statistics (NBS) indicate that the NPL in the nation's banking sector rose to N2.245 trillion in the third quarter of 2018, from N1.938 trn in the second quarter, representing about 40 per cent of the N8.7 trn 2019 federal budget.
The ratio of NPLs also rose to 14.16 per cent in the third quarter from 12.45 per cent in the previous quarter, far above the CBN's threshold of five per cent. In the same vein, the Nigeria Deposit Insurance Corporation (NDIC) said the risk assets examination of 20 deposit money banks (DMBs) as at 31st December 2016 revealed a total industry loans portfolio of N15.6trn, with the sum of N3.1trn (or 19.91 per cent) non-performing. "The 19.91 per cent NPL ratio was a 79.04per cent increase over the average industry ratio of 11.12 per cent recorded as at December 31, 2015," NDIC said.
While many banks have gone under and several others bailed out with hundreds of billions of public funds, the sharp increase in bad debts over the years calls for stringent measures and tougher capital rules. It is trite that the story of bank failures in Nigeria has been largely that of bad and doubtful loans, exacerbated by a not-too-tidy supervisory oversight by the regulatory bodies.
Despite the fact that the CBN's Monetary Policy Committee (MPC) had in recent times been expressing serious concern about the rising NPLs in the financial system, the apex bank has not done enough to exercise supervisory oversight in that direction. In our view, allowing NPLs to balloon from the permissible five per cent threshold to14.16 is both untidy and unacceptable. In the wake of the failure of Skye Bank for which the management and board members were asked to resign, the Minister of Finance, Zainab Ahmed, had expressed serious concerns over the rising incidence of NPLs in Nigerian banks. Read more from All Africa.
Source: All Africa