Analysts: Bank Recapitalization Could Exacerbate Unemployment

Economic analysts have forecasted that the current bank recapitalization initiative could exacerbate unemployment levels in the nation.

During separate discussions with the press, the experts also highlighted that the recapitalization process would compel certain banks to merge, resulting in job losses.

Commending the Central Bank of Nigeria, Shadrach Israel, a development economist at Lotus Beta Analytics, lauded the mandate for banks to enhance their capital base.

However, he acknowledged that the recapitalization drive could result in bank mergers, potentially leading to the closure of smaller banks and subsequent job losses for their staff.

“Based on the monetary policy, the recapitalisation move by the CBN is a good decision. First of all, the essence of the merger is to strengthen the financial system to ensure we have a viable banking system. “Just like before 2004, when we had about 89 banks and a lot of bank failures. One way to strengthen the banks is recapitalisation.

“Of course, the economy has changed since 2004. The GDP growth rate has also doubled. There is room for recapitalisation at intervals. The current move is long overdue, though it has both advantages and disadvantages.

“For the disadvantage side, we are already looking at a situation where many banks will not be able to survive it. From N25bn to N500bn; we are going to see a lot of mergers. Any bank that must survive will have to agree to a merger,” he stated.

According to Israel, international and regional banks are expected to handle the new capital thresholds with greater ease compared to national and smaller banks, which are likely to encounter challenges meeting the raised requirements.

In his view, Shadrach Israel suggested that as many as six to seven banks could be pushed towards consolidation due to the significant capital demands involved.

He suggested that the central bank should have taken into account a lower amount than N500 billion to facilitate the banks in meeting the requirements.

“The current amount poses a great financial gap for the banks. I feel like the rate of increase is so high. The apex bank should have tested some amount less than N500bn and seen how the economy reacted.

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“If it means having like four to five years to recapitalise instead of the two years notice. The disadvantage is that it may lead to unemployment and the closing of the banks unless they opt to merge. If the merger does not work, the banks may close down,” he enunciated.

He posited that the recapitalization plan could potentially bring about a scenario where the country has less than ten banks.

“We currently have about 25 to 30 banks and I think new ones have joined them. It is most likely that banks in Nigeria will reduce to a single digit. I’m hearing now that even the top six banks in the country may not be able to meet up with the requirement. Imagine if the top banks are merging, what happens to the smaller banks? “We are only hoping that the advantages will outweigh the disadvantages.

“I feel that the CBN is trying to fight the rot in the system. Nigeria and Kenya seem to have the most functional banking systems in Africa, but the governor felt there were lots of rots in the system, which he could regulate with the big stick.

The apex bank had on Thursday announced a 24-month recapitalisation programme for lenders in the country.

The new CBN guidelines were disclosed in a statement signed by its acting Director of, Corporate Communications, Sidi Ali.

She mentioned that the central bank had instructed commercial banks with global authorization to elevate their financial foundation to N500 billion, while domestic banks are required to reach N200 billion.

As per the acting CBN director, commercial banks holding national licenses are required to attain a minimum capital threshold of N200 billion, whereas those with regional authorization must strive for a capital floor of N50 billion.

Furthermore, non-interest banks endowed with national and regional authorizations must enhance their capital to N20 billion and N10 billion, respectively, as stipulated.

Furthermore, Jonathan Thomas, an economist at Sankore Investment Limited, underscored the importance of the apex bank’s measure in response to the heightened inflation rate, citing its role in economic contraction.

He observed that while the policy might have drawbacks for banks with insufficient capital and could even lead to job losses, it would play a crucial role in stabilizing the economy.

“One of the reasons why the CBN will consider increasing capital base requirement for banks is majorly to reduce the cash in circulation. The current level of inflation is an indication that we have so much money in circulation. As the definition goes, inflation is too much money chasing too few goods.

“The CBN’s policy is targeted at contracting the economy. One of the contractionary monetary policies is to increase the capital base of commercial banks. Once the capital base is increased, the liquidity will reduce, thereby, decreasing aggregate demand and contrasting other economic variables.

“However, there are some positive sides to it because inflation has a positive relationship with economic growth. There is a level of inflation that must exist in the economy at least two per cent of inflation is healthy in any economy but any level of inflation higher than that is abnormal,” Thomas explained.

He suggested that the CBN may have to consider some reverse measures to stabilise the economy.

“This policy will shoot down the inflation rate and economic growth will reduce, thus increasing unemployment.

“The spillover effect on the commercial bank is grievous. Some of the banks may go out of business and their staff will lose their job,” he added.

Africa Today News, New York

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