The Central Bank of Nigeria CBN has announced that two banks have failed to meet the stipulated Capital Adequacy Ratio (CAR) of 10 per cent. Sequel to this, the Central Bank of Nigeria (CBN) has directed management of two lenders whose CAR fell below threshold as at end of August 2014 to recapitalise.
According to CBN Deputy Governor (Economic Policy), Dr. Sarah Alade, the two banks, whose identities were not disclosed by the apex bank, have been put under close monitoring for compliance. She disclosed this to bank chiefs last Thursday at the Bankers’ Committee meeting in Abuja, where she presented the latest report on state of the economy and banking sector.
Nigeria joined other global banks to adopt the Basel I and Basel II Accord in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–2008. The Basel Accord is a global, voluntary regulatory standard on bank capital adequacy, stress testing and market liquidity risk. It stipulates that banks meet the regulatory minimum CAR of 10 per cent.
The CAR, also known as Capital to Risk (Weighted) Assets Ratio (CRAR), is the ratio of a bank’s capital to its risk. Regulators track a bank’s CAR to ensure that it can absorb a reasonable amount of loss and comply with statutory capital requirements.
This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a windingup and so provides a lesser degree of protection to depositors.
However, according to Dr. Alade, the banking sector and finance industry were adjudged to be resilient and healthy. Generally, according to the report, banks remained adequately capitalised with an average CAR of 17.75 per cent at end-August 2014, as against 18.1 per cent at end-August 2013, using Basel I capital adequacy framework.
The decline, CBN said, was due largely to increase in risk-weighted assets. Under Basel II framework, industry CAR stood at 15.76 per cent as at end- August 2014. Gross loans increased by 21.03 per cent from N9.278 trillion in August 2013 to N11.229 trillion in August 2014. Impaired loans (Non- Performing Loans – NPLs) increased by 16.36 per cent from N344.26 billion at end- August 2013 to N400.57 billion at end-August 2014, of which 66.84 per cent (N267.74 billion) loans loss provisions had been made.
Meanwhile, NPLs ratio stood at 3.57 per cent at end-August 2014, representing a decrease of 14 basis points compared with the corresponding period of end-August 2013. Similarly, there was a drop in Industry Liquidity Ratio, which declined from 50.6 per cent at end- December 2013 to 42.6 per cent at end-June 2014 due to increased Cash Reserve Ratio (CRR). As at end-August 2014, the ratio stood at 43.87 per cent while all operating Deposit Money Banks (DMBs) met the prudential minimum requirement of 30 per cent at end-August 2014.
Total industry deposits grew by 5.94 per cent (N937.74 billion) from N15, 783.14 billion at end-August 2013 to N16, 720.88 billion at end-August 2014. Industry unaudited profit before tax decreased marginally by about 0.004 per cent from N385.68 billion for the period January to August 2013 to N385.67 billion during the period January to August 2014. Also the Returns on Assets (ROA) and Returns on Equity (ROE) declined from 2.63 per cent and 22.47 per cent as at August 2013, to 2.39 per cent and 20.36 per cent as at August 2014.
The drop was attributed to high overheads, implementation of the revised guide to bank charges, increased contributions by banks to the Asset Management Corporation of Nigeria (AMCON) sinking fund and increase in CRR. The CBN put country’s external reserves at $39.37 billion as at October 13, 2014, indicating a decrease when compared with $42.85 billion at end- December 2013.
The current reserves level could finance approximately seven months of import. On the domestic scene, Gross Domestic product (GDP) growth at Q2 2014 peaked at 6.54 per cent with services contributing 36.9 per cent, agriculture 20.9 per cent and trade 16.8 per cent, were major drivers of growth. Crude oil and natural gas contributed 10.8 per cent, manufacturing 10.2 per cent and construction 4.3 per cent.
Key impediments to growth were identified to be the potential impact of Ebola Virus Disease (which has claimed over 3,441 lives) on economic activities and insurgency effect on agriculture production.
Source: New Telegraph
