Nigeria Delays New Bank Capital Rules in Bid to Avoid Recession

Lagos, Nigeria, Capital Markets in Africa: Nigeria plans to delay new capital rules for banks as regulators in Africa’s biggest economy follow fellow oil producer Kazakhstan in trying to boost lending and avoid a recession.

The Central Bank of Nigeria in 2014 ordered the country’s lenders it considered too big to fail to boost minimum capital adequacy ratios to 16 percent from 15 percent to increase their resilience to shocks. The new rules, which followed a banking crisis in 2008 and 2009 that nearly wiped out the industry, were scheduled to start on July 1.

The regulator wants to postpone the rules because the “sensible” thing to do is “reflate the economy and encourage lending,” Tokunbo Martins, director of banking supervision for the Central Bank of Nigeria, said by phone from the capital, Abuja. An announcement on the new date of implementation will be made by the end of the week, she said.

Africa’s biggest oil producer is struggling to cope with crude prices that have slid more than 50 percent over the past two years, while inflation at its highest level since February 2010 is hampering the ability of consumers to repay loans. Foreign-exchange restrictions aimed at protecting the naira have also caused a dollar shortage, impeding businesses and restricting currency dealing by banks.

‘Economic Headwinds’
Kazakhstan’s central bank in October postponed the introduction of tougher capital adequacy requirements for local banks following a depreciation in the local currency, keeping ratios for 2016 unchanged from last year. While Kremlin aides last year were said to have urged Russia’s central bank to delay capital rules under Basel III to avoid an economic crisis from deepening, the Basel Committee on Banking Supervision said in March that the country is compliant with the standards. 

Nigeria’s economy contracted in the first quarter for the first time since 2004 and a recession, or two consecutive quarters of contraction, is imminent, the central bank said last month.

The capital adequacy ratio of Nigeria’s largest lenders declined to 16.6 percent at the end of April from 17 percent a year earlier as “economic headwinds” increased, Martins said. If the rules had to implemented at the beginning of next month, it wouldn’t leave “much headroom for proper lending,” she said.

The inability of manufacturers and oil companies to meet their obligations may result in an increase in loans not repaid for at least three months, which will also affect their capital base, Martins said. “Apart from that, the avenues for banks to make profit like before have reduced.’’

Retain Earnings
The average ratio of non-performing loans for the banks rose to 10.1 percent in April from below 5 percent at the end of 2014, she said. The regulator is working to bring the ratio within the 5 percent minimum target by encouraging banks “to improve their risk management and also grow capital organically,’’ Martins said.

“If you can’t raise capital in the capital market because of the economy, the other way to raise capital is to retain whatever you are making internally,’’ she said.

Source: Bloomberg Business News