Nigeria Plans Tougher Bank Capital Rules as Bad Debts Weigh

(Bloomberg) -- Nigeria’s central bank plans to introduce fresh capital rules in the second quarter, threatening to heap pressure on lenders already weighed down by bad loans.

The new requirements will be stricter in terms of what funding qualifies as capital and will also require lenders to create “capital conservation” and “counter-cyclical” buffers, the Abuja-based Central Bank of Nigeria said in an emailed response to questions. The rule seeks to protect the nation’s banks “against shocks emanating locally and from abroad” by increasing the level of regulatory capital and the quality of the assets, it said.

Key Insights

  • The regulator is aligning itself with a global accord known as Basel III three years after a contraction in Nigeria’s economy spurred authorities to delay the implementation of tougher capital rules. It also comes after policy makers in 2013 spurned some requirements drawn up by the Basel Committee on Banking Supervision.
  • Nigerian authorities migrated banks to a new accounting standard known as IFRS 9 last year to improve disclosure by forcing lenders to provide for existing losses as well as those that might occur in the future. While the average capital-adequacy ratio for the industry rose to 12.1 percent in June from 10.2 percent at the end of 2017, some banks said the transition shaved as much as 200 basis points off their capital bases.
  • Lenders are struggling to contend with non-performing loans equal to 12.5 percent of total credit. While these have improved from almost 15 percent in 2017, many small- to medium-sized banks are battling to raise capital, leading to at least one takeover deal; that of Diamond Bank Plc by Access Bank Plc.
  • The central bank plans to “apply a leverage ratio to supplement existing capital ratios” for lenders as well as “additional loss-absorbency requirements for domestic-systemically important banks,” it said. “Country and cross-border risk guidelines are being developed for the assessment of risks arising from across border operations of Nigerian banks,” it said.
  • The Nigerian Stock Exchange Banking 10 Index, which measures the nation’s biggest lenders, rose 0.4 percent as of 1:18pm in Lagos on Thursday, paring losses this year to 2.4 percent.

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