Recapitalisation: Agora policy questions CBN’s exclusion of retained earnings

A report by Agora Policy, a Nigerian think tank and non-profit group committed to finding practical solutions to urgent national challenges, has faulted the Central Bank of Nigeria (CBN) on the exclusion of retained earnings in calculating new capital requirements for banks in the country.

The report titled, “Orthodox Monetary Policy Restored, But Price Stability Remains Elusive” stated that it is controversial and contradicts with the CBN’s historical position which encourages banks to retain profit against payouts as dividends.

The CBN had in March announced an increase in the capital requirements of different tiers of banks across the country – the first of its kind since the 2004/2005 recapitalisation exercise.

The apex bank hiked the capital requirement for Tier-1 banks to N500 billion while national banks’ capital’s expected capital was set at N200 billion.

However, the CBN noted that new capital would comprise of paid-up capital and share premium, excluding shareholders’ funds- a policy that has generated a lot of conversation.

Commenting on the policy in its latest report, Agora Policy stated that the rejection of retained earnings means the CBN now lacks justification for its prior position.

The report also argued that the recent depreciation of the naira in May reflects the lack of efforts on the part of the Central Bank of Nigeria (CBN) to secure large forex inflows to boost supply liquidity.

According to the think tank, the fundamental cause of the current divergence is policymakers’ lack of a coordinated effort to address the forex liquidity issue that is at the root of exchange rate volatility. It added further that the monetary policy actions of the CBN were merely cosmetic in light of the lack of effort to raise supply liquidity to the forex market to stabilise the naira.

It stated, “Indeed, the Naira appears to be in a realm of constant downside pressures with renewed weakness in May 2024 towards fresh lows of NGN1500-1600/$ despite the adoption of supposedly liberal forex policies that should have supported an appreciation.”

On the other hand, the report applauded the CBN on the unification of the forex market and near price convergence between the official market and the parallel window which was a key promise of the President Tinubu campaign.

It would be recalled that in April, during the World bank-IMF spring summit, the Governor of the Central Bank, Yemi Cardoso declared the naira as the best performing currency in the world referencing a Goldman Sachs report.

During this period, the naira traded at just over N1000/$ on the official market following the sale of dollars to BDCs at rates lower than the official market rate.

However, since then, the naira has been on a slide losing 26 per cent by the end of April and reaching the N1,500/$ levels akin to a market correction after the surprising strengthening seen in late March and early April.