Afrinvest Urges FG To Prepare Real Sector For Fresh Bank Funds

The Managing Director of Afrinvest West Africa, Chioke Ike, has urged the Federal Government and subnationals to provide real sector projects that could be financed by the fresh funds being raised by banks in the country.

The Central Bank of Nigeria in March directed banks to increase their capital base.

While speaking at the BusinessDay Policy Intervention Series with a focus on the implications of the banking sector recapitalisation, on Friday, Ike noted that, “Ultimately, the Federal Government and the states should be preparing real sector projects that can be financed and are bankable. If money goes into the real sector, it creates more opportunities and propels the economy. If the money comes into Lagos, say Ikoyi and VI and it is funding real estate, it creates a massive asset bubble, and then you have little enclave economies that are way overpriced and ultimately will crash and destroy the economy.

“We hope that everything works well. Unfortunately, we are in one of this catch-22 position because the FG is the biggest borrower. By printing money and borrowing it, they are sending money into the system. If we get to a system where the government can have a balanced budget, then the CBN would have the capacity to lower that and the banks can come into the real sector. It needs a lot of discipline on the fiscal side as well,”

Ike, who was the keynote speaker at the roundtable, further encouraged the CBN to improve its supervision during this capitalisation round.

He said, “But altogether, our view is that we are at this capitalisation, one area to focus on is increased risk management, even at the Central Bank itself because its capacity to supervise is going to be challenged when all these banks get the additional capital. “There is the potential for capital importation if banks have to go and seek capital outside, but I dare say from the experience of previous recapitalisation, what we saw between 2004 and 2005, most of the capital raised came from Nigerians. It was in 2006, 2007 that foreigners came in to join us in the IPOs that subsequently happened, but they also were quick to sell and run before the market crashed in 2008."

Also, he explained that the exclusion of retained earnings from the recognised share capital of banks would mean a deep discount for new investors.

According to him, “Given what the CBN has announced that retained earnings would not be included and from an accounting point of view, if you have N1tn as retained earnings and it is not to be counted as your capital, the smartest thing to do is to distribute it but you are not allowed to distribute it. So, we are stuck.

“The next thing is to look at the rights issue. Without the ability to distribute the retained earnings, this means that new investors are going to come in and buy these companies at a deep discount and that is really painful for the existing shareholders."

The CBN has disclosed that only the share capital and share premium items on the shareholder fund portion of the balance sheet will be recognised in this particular round of recapitalisation.