Nigeria’s Banking Recapitalisation: A Path to Economic Diversification and Stability
Nigeria’s ongoing banking recapitalization exercise is expected to play a crucial role in shaping the country’s economic future. According to Ayokunle Olubunmi, Head of Financial Institutions Ratings at Agusto & Co., while most banks are on track with their recapitalization plans, the process is far from complete. Although some of the recent mergers in the banking sector were prompted by banks’ struggles, the recapitalization drive is largely focused on raising capital to fortify the sector. The Central Bank of Nigeria (CBN) set a target for banks to submit plans to raise necessary funds, with most institutions adhering to their submitted strategies.
A significant observation in the recapitalisation process is the high reliance on domestic funds. Olubunmi noted that out of the N4 trillion required for the recapitalisation, around N2 trillion has been raised domestically, contrary to the initial expectation of heavy foreign investment. While some banks are still seeking foreign inflows, the increased capital base is expected to strengthen banks’ ability to support businesses that attract foreign interest, rather than relying directly on foreign capital influx.
Looking at investor confidence, Olubunmi is cautiously optimistic. Despite political uncertainties, most foreign investments have come from portfolio investors seeking high yields, which were driven by attractive returns last year. However, if yields decline, there could be a potential exit of these investors. Long-term foreign direct investment (FDI) is crucial for sustained economic growth, as portfolio investors tend to focus on short-term gains. Additionally, the potential for easing monetary policy remains contingent on inflation trends, with expectations that any easing would be gradual to maintain investor confidence.
The recapitalization process is expected to lead to the emergence of new economic sectors. Olubunmi draws parallels with the 2004/2005 banking recapitalisation, which led to the growth of sectors that were previously underdeveloped. He anticipates that banks will explore new sectors, supported by an increasing capital base. Along with the ongoing insurance industry recapitalisation and potential tax reforms, Nigeria’s financial landscape could see increased stability, which, if well-managed, would contribute to long-term economic growth. Agusto & Co. is actively involved in providing macroeconomic insights, market intelligence, and industry reports to support informed decision-making within the sector.
source: this day