The Director of Financial Policy & Regulatory Department of the Central Bank of Nigeria (CBN), Haruna B. Mustafa, has provided reasons for the exclusion of retained earnings of banks in the proposed capitalization process.
In the latest edition of CBN podcast published on the bank’s website on Monday, the CBN Director stated that the apex bank’s exclusion of retained earnings is to ensure that deposit money banks across the country inject fresh funds into their capital base.
He stated, “What we have simply done is to nudge the banks to inject fresh capital and this is without prejudice to what the component of shareholder’s funds could be. And like we have stated in our circular, shareholders’ funds would continue to be recognised in the computation determination of banks capital adequacy ratio which is an important metric in our assessment of the soundness of banks.”
Mustafa further noted that the recapitalization program is geared towards boosting the capacity of banks to take on bigger projects for the country’s growth and development.
He also referenced the bank’s recapitalization exercise of 2004 and how it helped in insulating banks across Nigeria from the ripple effects of the global financial crisis of 2008, noting that efforts of the current recapitalisation would help to strengthen Nigerian banks against unforeseen global financial threats.
Recommended reading: Bankers oppose exclusion of retained earnings in CBN recapitalization terms
Backstory
Last month, the CBN announced an increase in the capital requirements of different tiers of banks across the country– the first of its kind since 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.
Nigerian bankers have voiced out their opposition to the exclusion of retained earnings, noting that it is flawed and contravenes the conventional and legal treatment of company’s capital structure.
