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Haruna B. Mustafa, the Director of the Financial Policy & Regulatory Department at the Central Bank of Nigeria (CBN), has clarified the rationale behind the exclusion of retained earnings of banks in the proposed capitalization process.
In the latest episode of the CBN podcast, available on the bank’s website, Mustafa explained that the decision to exclude retained earnings aims to encourage deposit money banks nationwide to infuse fresh funds into their capital base.
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He stated, “Our objective is simply to encourage banks to inject new capital, while still acknowledging the significance of shareholders’ funds in determining banks’ capital adequacy ratio, which is a crucial metric in assessing their stability.”
Mustafa emphasized that the recapitalization initiative seeks to enhance banks’ capacity to undertake larger projects that contribute to the country’s growth and development.
He also referenced the successful recapitalization exercise of 2004, highlighting how it shielded Nigerian banks from the adverse effects of the global financial crisis in 2008.
Mustafa asserted that the current recapitalization efforts aim to further fortify Nigerian banks against unforeseen global financial challenges.
Background
Last month, the CBN announced an upward revision of capital requirements for various tiers of banks in Nigeria, marking the first adjustment since the 2004/2005 recapitalization exercise. Tier-1 banks now face a capital requirement of N500 billion, while national banks are expected to maintain a capital base of N200 billion.
However, the CBN specified that the new capital would consist of paid-up capital and share premium, with shareholders’ funds being excluded – a policy that has sparked considerable debate.
Nigerian bankers have criticized the exclusion of retained earnings, arguing that it deviates from the conventional and legal treatment of a company’s capital structure.
