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How CBN’s interest rate hike threatens recapitalisation – Analysts

Experts have raised  concerns that the Central Bank of Nigeria’s (CBN) bid to sustain interest rate hikes may throw the banks into troubled waters with regards to raising funds from the equities market to meet the minimum recapitalisation requirement

According to them the that CBN’s orthodox monetary policy, if not checked, could dampen investors’ appetite towards banks’ intending offers to raise funds from the stock market to meet the minimum requirement.

The ICIR reports that the CBN Governor, Olayemi Cardoso, had repeatedly said the apex bank would continue to use orthodox methods to tame inflation. This means that, as inflation rises, the apex bank would react by raising the monetary policy rate (interest rate).

Already, the apex bank  has  set March 31, 2026, as the deadline for all the categories of banks to meet the minimum capital requirement effective from April 1, 2024, pegging the capital requirement at N500 billion for commercial banks with international exposure.

It put the minimum capital base for commercial banks with national authorisation at N200 billion, N50 billion for regional banks and merchant banks, N20 billion and N10 billion for non-interest banks with national and regional operations, respectively.

With two months underway, the banks are already initiating moves on how to raise funds through the capital market.

Access Holdings, Zenith Bank, United Bank for Africa, and other banks have passed resolutions at their Annual General Meetings (AGM) to raise their capital base through the stock market.

For instance, Access Holdings had resolved to raise capital of up to N365 billion by way of a rights issue subject to the approval of relevant regulatory authorities.

Reasons for recapitalisation

According to analysts, recapitalising has become necessary as it helps to measure banks’ financial soundness, ensures the safety of depositors’ funds, deepens financial intermediation, and enhances the banks’ capacity to support economic growth through investment funding.

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The last major review of the banks’ minimum capital base was carried out in 2005, under President Olusegun Obasanjo, with Chukwuma Soludo as thevthen CBN governor.

Since then, the value of banks’ minimum capital has significantly been eroded by inflation and exchange rate valuation.

The real issue, which financial experts have pointed out, is that inflation has weakened money’s value over time, making re-capitalisation imperative and inevitable.

By increasing the minimum capital requirements, the CBN is aiming to ensure banks have a robust capital base to absorb unexpected shocks, and losses and the capacity to contribute to the growth and development of the Nigerian economy

It is also aimed to engender the emergence of stronger, healthier and more resilient banks to support the achievement of  President Bola Tinubu-led administration’s dream of a $1 trillion economy by the year 2030.

The concerns

Financial experts have  expressed worries about the banks attracting investors’ confidence bearing in mind the negative sentiment the CBN’s rate hike has brought to the equities side of the Nigerian stock market.

According to analysts, the stock market is best for raising long-term funds for its operations. However, they note that that market had been hard hit by the apex bank’s orthodox monetary policy, albeit continuous interest rate tightening by the apex bank.

Since the beginning of this year, specifically between February and May, the apex bank has tightened the MPR by 750 basis points, dipping the stock market performance.

The All-Share Index, a benchmark index that reflects the performance of the Nigerian stock market, had dipped to 99,276.03 basis points as of May 30 from 101,995.53 basis points as of February 26.

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The banking index of the Nigerian Stock Exchange also reflects the sentiment the CBN rate hike has created among investors as the index has fallen from 889.47 basis points to 797.81 basis points between February 26 and May 30.

SEC proposes framework for banks

The Securities and Exchange Commission (SEC) has said it would soon issue a framework that will guide the capital market in the proposed recapitalisation exercise by banks.

The Acting Director General of the SEC, Emomotimi Agama, hinted at a meeting with the Institute of Capital Market Registrars on Friday, May 24.

“We are on top of the issues around the recapitalisation exercise, and very soon we will come up with a framework to guide the market,” Agama said

Policy will strain investors’ confidence – experts

The national president of New Dimension Shareholders, Patrick Ajudua, said if not checked, the apex bank’s monetary policy will likely dampen investors’ appetite towards offers to raise funds from the stock market to meet the minimum requirement.

“We acknowledge the use of monetary policy tools by the CBN in controlling inflation but such have not appeased investors’ sentiments in the capital market,” said the national president of New Dimension Shareholders, Patrick Ajudua.

He anticipates that most banks will rather raise funds via foreign investors where the cost of funds is minimal compared to Nigeria and also through bonds, equity participation and private placement.

“It will be difficult to raise such funds within our economy which is bedevilled with numerous macro-economic challenges and a difficult operating environment.

“The bank may also create a space for retail shareholders via the right issues. Though the outcome is better to imagine than envisage where the purchasing power of average citizens has been eroded,” Ajudua said.

To mitigate the seemingly impending negative sentiment, the banks need to assure investors of commitment to appreciable returns on investment, improve transparency and corporate governance structure and assurance of improved risk management framework, he suggested.

Similarly, the head of Financial Institutions Rating at Agusto&Co, Ayokunle Olubunmi, noted that the CBN has been in a tightening mode since this year and would continue hiking the rate if inflation further.

He said reflecting on the orthodox policy, it was expected that it would cause a reversal in the equities market performance

Returns on investment in the equities market are variable and also depend on the underlying performance of the companies, he said.




     

     

    “As for the fixed income market one variable that depends on the return is the prevailing benchmark interest rate. That is why we are seeing investors gradually moving away from equities to fixed-income securities.

    “We expect that trend to continue in the near term as more investors move from equities to fixed income market. The rate hike has seen the banking index drop in recent months.”

    So, for banks that want to raise rights issue, it then means that they have to do a bit more work to convince investors as the equities do not look attractive now,” he said.

    Olubunmi added that the banks might have to issue more than rights issues, and sought for foreign investors.

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