Role of bank capitalisation in economic expansion: Opportunities for you as an investor
Nigeria’s economic growth story is built on a strong foundation – well-capitalised banks.
These banks act like well-stocked irrigation systems, channelling essential funds towards critical sectors and ensuring the economy flourishes.
Strong capital reserves empower banks to lend with confidence, directing those funds like life-giving water to propel growth.
This becomes especially clear when looking at the staggering growth of electronic transactions in Nigeria, reaching a massive ₦600 trillion in 2023 (a 55% increase year-over-year according to NIBSS data).
Banks act as intermediaries, bridging the gap between savers and borrowers. providing liquidity, facilitating payments, and supporting investment and growth.
This is evident in the Central Bank of Nigeria (CBN) records which show that banks extended a total credit of N44.54 trillion in 2023.
Banks are like a bridge, connecting lenders (depositors) with borrowers. Strong, well-maintained pillars are crucial for a safe passage. In the world of banking, these pillars are bank capital.
Bank capital refers to the financial resources a bank sets aside to act as a buffer against potential losses and to support its day-to-day operations. Imagine it as a safety net. It is comprised of several key components:
In essence, higher capital levels make banks more resistant to financial challenges, enabling them lend more confidently and potentially offer better loan terms.
The Basel III framework categorises bank capital into tiers based on their loss-absorbing capacity:
Leading banks go beyond minimum regulatory requirements, assessing their specific capital needs based on their risk profiles.
This proactive approach ensures they have enough resources to navigate market fluctuations and challenges, contributing to a more stable financial system.
Strong bank capital is crucial for several reasons:
Recognising the importance of well-capitalised banks for Nigeria’s economic growth, the CBN launched the Banking Sector Recapitalisation Programme 2024.
This initiative requires banks to increase their minimum paid-in common equity capital according to their licence category:
These requirements were set after reviewing banks’ risk profiles, global and domestic challenges, as well as the results of stress tests. The program aims to create stronger, more resilient banks that can support Nigeria’s goal of a US$1 trillion economy by 2030.
Historically, the 2005 consolidation of the Nigerian banking sector, which required banks to raise their capital base to ₦25 billion, led to significant restructuring, including mergers and acquisitions.
Importantly, metrics like domestic sector lending to the private sector increased as a percentage of gross domestic product (GDP) from 8.1% in 2006 to 19.6% in 2009 (World Bank data).
In 2005, banks’ new issues were worth ₦517.6 billion, representing about 75% of the total new issues value of ₦692.86 billion in the capital market (Al Faki M, 2006; NSE data). There was increased availability of funds for SMEs, with banks getting the opportunity to explore expansion to other regional and international markets. The recapitalisation efforts also attracted $652 million in foreign direct investment in 2005.
Nigeria’s focus on bank recapitalisation is well-founded, drawing insights from India’s public sector bank recapitalisation.
A 2022 study highlighted the positive impacts of the Indian government’s recapitalisation efforts in 2016 and 2017, which injected INR 2,33,915 crore into public sector banks. The results included:
India’s experience underscores the potential benefits of bank recapitalisation, leading to a more robust banking system and contributing to economic growth.
In a 2022 article, Science Direct writes: “We find strong evidence in favour of both the financial stability and bank lending channels. When banks hold more capital, financial stability improves, and this is followed by higher levels of economic growth. Lending also increases when banks expand their capital base, similarly raising real GDP growth.”
Banks can raise capital through various methods:
Sources of capital include:
Coronation Securities views the recapitalisation initiative as a timely boost for economic growth. Adequately capitalised banks can undertake larger transactions, enhancing the resilience of the banking sector and the broader economy.
With Coronation Wealth, investors gain access to a diverse range of investment options, including the ability to purchase shares in companies undertaking rights issues or public offerings. This platform serves as a gateway for retail investors to engage in the capital market, providing them with the tools, resources, and support needed to make informed investment decisions.
To benefit from the bank recapitalisation policy, HNI (and Ultra HNI) investors should consider:
By following these strategies, investors can leverage potential benefits of the recapitalization policy and contribute to Nigeria’s economic growth.
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You can reach us through our website at coronation.ng, by email at crc@coronationsl.com, or by phone at 02012272571-73.
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