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Why regulators relax banks’ ratios

Managing Director/Chief Executive Officer of the Nigeria Deposit Insurance Corporation, Umaru Ibrahim

Managing Director/Chief Executive Officer of the Nigeria Deposit Insurance Corporation, Umaru Ibrahim

Reels out deposit policies, tasks banks on business models
Expert disagrees on CBN-FMDQ forex operations

With Nigerian banks’ prudential ratios ranging from 10 to 16 per cent depending on the status of the financial institution, the regulators can relax the rules without leaving them vulnerable.

This is because the international standard and practice stipulated eight per cent, an indication that banks in Nigeria made excess provision for the uncertainty that is now rocking the economy.

While the Central Bank of Nigeria has been reiterating that no bank in Nigeria is distressed, the Nigeria Deposit Insurance Corporation (NDIC) corroborated this at its seminar for Business Editors and Finance Correspondents, in Kaduna State, at the weekend.

Prudential ratios are used by banks and regulatory authorities to monitor and determine the stability of the banks’ finances. They include capital adequacy and liquidity, among others.

NDIC said CBN could deliberately relax its stringent prudential supervisory tools imposed on banks over the years as a measure to maintain financial stability, liquidity and boost cash flow in the banking system, particularly in period of economic recession.

The Director, Bank Examination Department, NDIC, Adedapo Adeleke, while speaking on “Refocusing banking supervision in Nigeria in an era of economic recession”, explained that the relaxation of some of the prudential guidelines as currently being observed was deliberate.

He stated that in times of economic boom, these ratios were made more restrictive, particularly the capital adequacy ratio- between 10 and 16 per cent, to create capital buffers, which now serve a strategic stability goal.

He said whatever happens in any nation whether economic boom or recession affects its banking system because the banks cannot exist in isolation of the nation’s economy, but maintained that the systemic impact on banks by the current economic recession in Nigeria, had been contained by early adoption of these macro-prudential guidelines.

Meanwhile, the corporation has reiterated that banks’ survival in a turbulent environment that is ongoing requires uncommon business models and practice.

Consequently, it warned that microfinance banks and Primary Mortgage Banks (PMBs) must adopt transformative business models that put the customer in focus and acceptable by the market.

The Director of Special Insured Institution Department, J.J. Etopidiok, who made the disclosure in Kaduna State at the workshop noted the regulator on its part, has upped strategies to ensure the financial sector’s resilience.

Noting that the Microfinance/PMB segment holds great potential for economic development, he said that NDIC has extended insurance cover for PMBs to N500,000 per depositor from N200,000.

It has also instituted insurance cover for agency banking, online, mobile money to the tune of N500,000, in efforts to deepen payment system and institute confidence in alternative payment channels.

Besides, the Differential Payment System has billed to take off in January, as a way to commence efficient calculation of premium payable by financial institutions.

For the PMBs, it would help in assessing risks associated with each bank given the corporate governance level, leading to either increase or decrease in premium payable, as the case may be.

To ease access to the liquidity window of the Nigeria Mortgage Refinancing Company by PMBs, the regulators are fine-tuning a credit underwriting scheme, that would assign a composite risk rating to the banks.

This would help them get new funding from NMRC to pursue new housing projects.

Meanwhile, an expert has faulted the involvement of the Central Bank of Nigeria (CBN) in the board of the FMDQ OTC Securities Exchange, a profit making company, designated for the management of the interbank foreign exchange (forex) market.

Speaking on Nigerian banks’ asset quality in a period of economic recession”, yesterday, in Kaduna State, the Executive Chairman of Society for Analytical Economics, Dr. Godwin Owoh, noted that the appointment of the Deputy Governor of CBN, Dr. Sarah Alade, even as the company’s Chairman, contravened the Section 34 of the CBN Act.

He contended that the CBN cannot at the same time be acting as regulator and operator in the foreign exchange market management.

Owoh noted that the futures market foreign exchange trading currently being operated also contravened the Foreign Exchange management Act of 1998 which only allowed foreign exchange spot trading. He stressed that the foreign exchange futures market is a violation of the law.

According to him, the economic recession that the National Bureau of Statistics (NBS) declared this year following two consecutive quarters’ decline in Gross Domestic Product (GDP) did not occur this year.

Citing NBS statistics since 2013, he said that the nation had passed the stage of recession and is currently in economic depression, as unemployment rate, escalated prices of food items, depreciation in the value of the currency and general economic downturn, which are indices for measuring depression had been in Nigeria for many years ago.



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