Connect with us
nairametrics
UBA ads

Financial Literacy

Meaning Of Capital Adequacy Ratio (CAR) As Defined By The Central Bank Of Nigeria

Published

on

Serving of Domestic Debt

Capital Adequacy Ratio (CAR) is basically the proportion of the bank’s tier 1& tier 2 equity (Qualifying capital or Equity) as a proportion of its risk weighted assets (loans). It is the proportion of a banks own equity in relation to its risk exposure. If a bank for example, has ₦200 billion risk weighted assets and has a qualifying capital of ₦60 billion then its CAR is ₦60 billion/₦200 billion which is equal to 30%.

The capital adequacy ratio (CAR) for banks in Nigeria currently stands at 10% and 15% for national/regional banks and banks with international banking license, respectively.

UBA ADS

In the computation of CAR recommended by Basel Committee on Banking Supervision (BCBS), Tier 2 capital should not constitute more than 50% of the qualifying capital, that is, 100% of Tier 1. However, banks designated as SIBs would be required to maintain a minimum CAR of 15% out of which Tier 2 capital should not constitute more than 25% of the qualifying capital.

In other words, Tier 1 capital should be at least 75% of the bank’s qualifying capital. In addition, SIBs in Nigeria would be required to set aside Higher Loss Absorbency (HLA) or additional capital surcharge of 1% to their respective minimum required CAR.

This should be met with Common Equity Tier 1 (CET1) capital6. The aim of the additional loss absorbency requirement is to ensure that the SIBs have a higher share of their balance sheet funded by instruments that re-enforce the resilience of the institution as a going concern.
In a situation where the foreign subsidiary of a Nigerian bank is considered systemically important by the host authority, the Central Bank of Nigeria and the host authorities would make arrangements to coordinate and cooperate on the appropriate HLA requirement, within the constraints imposed by the relevant laws in the host jurisdiction.

GTBank 728 x 90

CAR helps regulators protect depositors from banks who lend aggressively and in doing so do not get back most of the money lent.  This is because when a bank makes large loan losses that wipe out its total equity, it may lead to an immediate bankruptcy thus making depositors loose their money.

Different countries have methods of determining what constitutes Tier 1 & 2 capital as well as risk weighted assets. The Central Bank of Nigeria currently provides guidelines for determining what these components are and can be found following the link below.

FORMULA FOR CAPITAL ADEQUACY & LIQUIDITY RATIO

Note: This article was originally Published May 9, 2013 but has been modified to reflect current variation to the definition of CAR

onebank728 x 90

Patricia

Ugo Obi-chukwu "Ugodre" is a chartered accountant with over 16 years experience in financial management, corporate finance and financial analysis. He is also a retail investor and a personal finance advocate with over a decade experience investing in the Nigerian stock market. Ugo is the founder/Publisher of Nairametrics and blogs regularly on the website.

2 Comments

2 Comments

  1. Ayotunde Adedokun

    November 7, 2018 at 9:53 am

    Very good write up. So educative. Have learnt a great deal. I am just a Microfinance Bank staff working in audit and control. I will appreciate if i can get more tutorial on how to divest financial statements and other parameters useful to access financial position of financial institution.

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Investment Tips

What bad stocks have in common with bitter relationships 

The feeling you get from marrying the wrong partner is similar to that felt after buying the wrong stocks.

Published

on

I have always argued that stocks cannot be summarised into one statement for a newbie, until recently when a friend told me that it could.  

“Simply put, buying stocks can be likened to relationships, he said.  

UBA ADS

did not immediately agreebut over the next few minutes, he explained to me what he meant, and drew several analogies to back his claims.  

While he is no expert, I understand that he has drawn his conclusion from his experience buying stocks for himself over the past 5 years, so I took his points seriously. These points have been summarised in this article. 

READ MORE: Cocoa prices melt lower as COVID-19 weakens demand 

GTBank 728 x 90

When it crashes, there is no telling how far it can go  

My friend mentioned of some company’s stock he bought in 2016 in the hope of selling short-term. At the time he bought, there was a dip and he expected things to pick up within some months so he could sell-off.  

Two years later, the stock price had plummeted 50% down from the price at which he bought. Without saying, he became a long-term investor because he was not ready to sell off at a loss.  

 

onebank728 x 90

How does this liken to being in a bad relationship?

As the value plummets, you keep hoping it will rise again and then before you know it you are stuck for the long haul. Same thing can happen with a wrong partner. You remain there hoping things will be better but it gets worse. 

It could happen sometimes that a company’s stock market price comes crashing and it never goes back to where it was againThe factors which triggered its fall, may not even be able to return it to its starting price.  

 

app
GTBank 728 x 90

The stock price is not indicative of the company’s profitability 

For some reason, there are company stocks market prices that remain low year after year despite the billions declared in profits, and the dividends paid out to shareholders.  

Sometimes, the stock market price could still slump even when the company has positive records in its financials. Market experts are not always able to explain this, but it remains true. Some of the most profitable stocks are undervalued.  

 

You can never take stocks at face value

That a stock has been on an upward trend in the last few months does not mean it will remain so. One must always consider several other factors before purchasing a stock.  

While it is important to look at past performance, there are other things that could point to the likely future of such stocks. 

app

Say, for instance, the company has just announced a new board chairman who was implicated in some fraud cases in the past. It doesn’t matter how well the stocks have performed in the last 365 days, or the chairman’s competence, the stock prices are most likely to slump due to loss of investor confidence.  

There was a recent case where the CEO of an internet service provider company was alleged to have been involved in sexual harassment, and was eventually pressured by shareholders to resign. The pressure came not necessarily because they thought he was guilty, but because of the implications on the company.  

You have to probe to discover the real qualities.  

 

The most expensive stocks are not necessarily the best. 

If you ever heard a stock described as under-priced or over-valued, then you should understand that the price you pay is not necessarily suggestive of the value.  

Some great stocks, with good potentials, high liquidity, good company profile and adherence to corporate governance ethics, are not as expensive as they should be. While some other stocks are ridiculously overpriced, even when they do not have as much promise. Some of these overpriced stocks could still be basking in past glory or just positive media hype.  

This explains why investors must conduct due diligence before putting in their hard-earned money. Sometimes the media hype around a company’s stock might not be giving you all the information you need to make a decision, so you necessarily have to go the extra mile.  

Subscribe to newsletters from financial news websites if you need to, take courses if you have to, but ensure to learn all you can.  

Remember price is what you pay for the stock, but value is what it is really worth, and there is no law stating that one must justify the other.  

READ MORE: Global stocks records astronomical gains in Q2 2020

When you get the wrong stocks, you get stuck! 

You know that feeling when you are sure that you have made the wrong choice, but also know that there is no way out? That’s the feeling you get when you marry the wrong partner, as my friend said. And that’s the same feeling you get when you get the wrong stocks.  

You simply get stuck.  

No returns. No dividends. Probably, no way to sell either because no one else is interested in buying from you. And if you do succeed in selling off at this point, you would most likely be doing so at a loss.  

If you study trends in the stock market, you will see some dormant stocks that have remained stagnant for long periods of time. No rise in share price, no fall in share price, and no share is being traded either.  

READ ALSO: Best time to make money trading BTCs

It is not a nice position to be in, and that is why you want to be sure of the company, its management, and board members who take the decisions before you decide to buy or not, even more so when you are a long-term investor.  

And even then, with the wrong stocks, you could suddenly find that your proposed short term investment of 6 months will run into years because you keep waiting for things to pick up before you sell.  

Patricia
Continue Reading

MSME

130 farmers to receive seed funding of N100,000 each

The target of the programme is to adopt farmers in 774 LGAs across the country.

Published

on

The National Information Technology Development Agency has kick-started a job and wealth creation programme where 130 farmers will each receiv, e seed funding of N100,000Border Closure: Nigerian rice farmers are struggling to feed a rice-hungry nation. CBN to give Niger Delta rice farmers single-digit loan 

The National Information Technology Development Agency has kick-started a job and wealth creation programme where 130 farmers will each receive seed funding of N100,000. The programme will be supervised by the Federal Ministry of Communication and Digital Economy.

According to a statement from the agency, the National Adopted Village for Smart Agriculture (NAVSA) programme is in line with the government’s drive to lift 100 million Nigerians out of poverty, and it will start with 130 farmers in Jigawa state.

UBA ADS

 

The target of the programme is to adopt farmers in 774 LGAs across the country, open the platform to all agriculture ecosystem players with access to information, facilitate and improve productivity, reduce the cost of production, and facilitate access to local and international markets.

GTBank 728 x 90

READ MORE: President Buhari directs Ministries of Power, Finance, BPE to seal Siemens deal

With all of this in place, it is expected that the farmers will be able to build sustainable business models and digital business opportunities that will create not less than 6 million well-paying jobs in the next 10 years.

“NAVSA Platform is aimed at digitalising agriculture to drive Digital Economy, as part of President Buhari’s agenda to leverage on technology and innovation to revolutionise the agriculture value chain,” the statement read.

onebank728 x 90

Dowmload the Nairametrics News App

Among other things, the farmers will be empowered with a digital platform, smart devices (tablets), connectivity for data and calls, Digital agripreneurship skills, and enrolment with telecom operators and the National Identity Management Commission (NIMC) for identification.

All of these will be given to them at the end of the programme, which will last from July 1 to July 13, 2020.

app
GTBank 728 x 90

Patricia
Continue Reading

MSME

Business owners will now get CAC certificate with TIN

This will also allow them to easily request loans and credit facilities from financial institutions.

Published

on

PwC's MSME Survey 2020

As part of the Ease Of Doing Business Initiative, the Corporate Affairs Commission (CAC) will now work with the Federal Inland Revenue Service (FIRS) to issue Tax Identification Numbers (TIN) along with the Certificate of Incorporation.

This will save companies and small business owners the troubles of applying separately to the FIRS for their Tax Identification Numbers.

UBA ADS

This was contained in a statement signed by the Corporate Affairs Commission (CAC) on Monday, June 29, and seen by Nairametrics.

Conduct advanced financial calculations using Nairametrics Calculators

The statement reads in part “Certificates of Incorporation of companies registered under part A of the CAMA will henceforth carry Tax Identification Numbers (TIN) issued by the FIRS”.

GTBank 728 x 90

With this development, companies and business owners can now proceed to open a corporate account upon receiving their Certificate of Incorporation, rather than waiting another week or more for the issuance of Tax Identification Numbers.

READ MORE: How FG plans to support Women-owned MSMEs to recover from the pandemic

This also allows them to easily request loans and credit facilities from financial institutions and dispenses the need to visit the FIRS office.

onebank728 x 90

For the revenue collection agency, the development is set to improve the accuracy of its database of registered businesses operating in the country and can aid it to widen its revenue net.

 

app
GTBank 728 x 90
Patricia
Continue Reading