The Central Bank of Nigeria (CBN) directive to banks to recapitalise has been described as a move that will lead to a decline in interest rate.
The projection was made by Professor Adeola Adenikinju President Nigerian Economic Society in his paper titled, “Bank Recapitalisation and the Macroeconomy in Nigeria”, which he presented at the Q2 2024 Association of Capital Market Academics of Nigeria (ACMAN) symposium held via Zoom.
Professor Adenikinju stated that Bank recapitalisation increases the capital base of banks which, in turn improves their liquidity, and the higher liquidity increases the supply of money within the economy.
“Holding constant the demand for money in the economy, the real interest rate decline. The fall in the real interest rate imply a fall in the price of loanable funds which provides an incentive for businesses to borrow”, he pointed out.
He explained that the result of the above mechanism is an increase in aggregate investment as more businesses take advantage of the relatively lower interest rate to borrow for their investment.
According to him, “Given the additive nature of investment in the national income accounting, higher aggregate investment leads to an increase in the aggregate output or income.”
He reiterated that Bank recapitalisation will lead to ncrease bank liquidity culminating to real interest rate fall, and rise in aggregate investment and increase in aggregate output.
“Based on the theoretical channels of interest rate, exchange rate, Tobin Q, the wealth of shareholders, and the balance sheet, bank recapitalisation can be beneficial for the banking sector and the Nigerian economy as whole.
“The improvement in capital adequacy, liquidity, bank valuation, lending, and investment can enhance the growth of output in Nigeria”, Professor Adenikinju further stated.
However, he said there must be policy measures to prevent inflation and avoidable appreciation of the naira so that Nigeria can maximise the benefits of the recapitalisation.
In addition, he said banks must also be encourage to expand lending across the sectors of the economy including the perceived risky sectors like the SMEs, agriculture, etc.
“Executed properly, bank recapitalization can improve the performance of the financial sector with ripple effects on the Nigerian economy that promote investment, consumption, and economic growth”, he submitted.
He explained that the prevailing macroeconomic challenges necessitated the recent move of the Central Bank of Nigeria (CBN) to review the minimum capital requirements for Nigerian banks.
The CBN on March 28, 2024 issued a memo raising the minimum capital requirements for commercial, merchant and non-interest banks in the country, while also giving existing banks two years to raise their capital in line with the new requirements.
The unveiled new minimum capital requirements for banks, pegged the minimum capital base for commercial banks with international authorisation at N500 billion.
It pegged the new minimum capital base for commercial banks with national authorisation at N200 billion, while the new requirement for those with regional authorisation is N50 billion.
The new minimum capital for merchant banks would be N50 billion, while the new requirements for non-interest banks with national and regional authorisations are N20 billion and N10 billion, respectively.
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