Haruna B. Mustafa, the Director of the Financial Policy & Regulatory Department at the Central Bank of Nigeria (CBN), has provided insights into the exclusion of retained earnings of banks in the proposed capitalization process, amidst objections raised by some bankers.
The decision announced just two weeks ago, has stirred a robust debate within the banking sector.
Mustafa, speaking in the latest edition of the CBN podcast published on the bank’s website on Monday, clarified that the apex bank’s rationale behind excluding retained earnings is to encourage deposit money banks nationwide to infuse fresh funds into their capital base.
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Mustafa explained, “What we have simply done is to nudge the banks to inject fresh capital and this is without prejudice to what the component of shareholder’s funds could be. And like we have stated in our circular, shareholders’ funds would continue to be recognized in the computation determination of banks capital adequacy ratio which is an important metric in our assessment of the soundness of banks.”
Moreover, Mustafa noted that the recapitalization program aims to bolster the capacity of banks to undertake larger projects for the growth and development of the country.
Referencing the success of the bank’s recapitalization exercise in 2004, Mustafa highlighted its pivotal role in shielding banks across Nigeria from the fallout of the global financial crisis of 2008. He emphasized that the ongoing recapitalization efforts are geared towards fortifying Nigerian banks against unforeseen global financial threats.
Last month, the CBN announced a revision in the capital requirements of various tiers of banks across the country – marking the first such adjustment since the 2004/2005 recapitalization exercise. The apex bank raised the capital requirement for Tier-1 banks to N500 billion, while national banks’ capital expectation was set at N200 billion.
However, the CBN specified that the new capital would consist of paid-up capital and share premium, excluding shareholders’ funds – a policy that has sparked considerable debate.
Many bankers have voiced their concerns, arguing that the Central Bank’s decision to exclude retained earnings from share capital calculations is flawed and contradicts conventional and legal treatments of a company’s capital structure.
They contend that this approach overlooks the actual value represented by these earnings, which conflicts with conventional and legal treatments of a company’s capital structure.
Furthermore, some bankers argue that while the Central Bank prefers banks to retain most of their earnings to bolster their capital base, it should not simultaneously prevent them from counting these undistributed earnings as part of their capital.
The central bank acknowledged that the policy is part of its efforts to boost Nigeria’s economic growth in line with President Bola Tinubu’s $1 trillion economy plan. The federal government had late last year, admitted that the banks’ recapitalization policy is geared toward attracting foreign direct investments.
“In the economy facing all of us, our ambition to attain the $1tn appears daunting, but we believe it is achievable with God on our side and our collective determination. This explains why the Vice President and I have been on the road trying to attract huge investments into various phases of our economy: agriculture, oil and gas and others,” Special Adviser on Information and Strategy, Bayo Onanuga, said.
“To arrive at the $1 trillion economy, we must address the capital adequacy of our banks that will prepare the fuel for this journey.”